4 Ways to Cover Card Fees
Samuel Dickison
Intro
There’s an old, old proverb: “The little foxes spoil the grapes.” It’s as true in business as it is in farming; little details that mean the difference of a few cents here and there can become a crisis if left unaddressed. Credit card fees are one such detail. Fifty cents a transaction times 100 transactions a day times 260 business days is $13,000 a year. That’s a big bill that someone has to pay.
Which leads us to the question every small business owner has likely asked themselves: can I charge a credit card fee? The good news: maybe. You probably have more options than you think. But let the seller beware. Credit card companies have all the humor of hungover lawyers: step out of line and you could be facing up to $1,000,000 in fines and a lifetime blacklist. Below, we’ll explain what you can and can’t do to keep more money and avoid the sharks, plus a unique option available only to consignment store owners.
The Three Main Options
Most business owners have essentially three options when it comes to covering their credit card fees (assuming they don’t want to just pay the fees themselves). Each comes with its own set of rules.
Surcharging
Surcharging is simply adding a fee to credit card transactions so that the cost is passed on to the buyer. It’s the most straightforward option, but also the one most beset by credit card regulations and state law.
Card companies require that:
You notify your processor and the card network at least 30 days before implementing a surcharge.
You disclosed surcharges at the point of entry, point of sale, and on every receipt as a separate line item.
The fee you charge cannot exceed the fee you pay (Visa caps it at 3%, Mastercard at 4%). Even nailing down the actual rate you pay can be tricky depending on your processor.
You can never surcharge debit or prepaid cards, even if the customer selects "credit" at checkout.
State law also has a lot to say about surcharging:
California, Connecticut, Maine, and Massachusetts prohibit surcharging outright.
Colorado allows it but caps it at 2%.
Minnesota requires surcharges to be built into the advertised price.
And some states like Texas are complicated: state laws bans surcharging but a federal court decision has essentially allowed it… it’s the wild west.
The penalty for breaking the rules is steep: businesses can face fines from $5,000 to $1,000,000, as well a lifetime ban on working with card processing companies. Our advice? Do your homework if you want to charge a surcharge.
At ConsignCloud, we do offer a simple surcharging solution for customers using integrated card processing through Gravity Payments.
Convenience Fee
A convenience fee is a fixed fee used almost exclusively for non-standard forms of payment: think, paying your city water bill with a credit card instead of mailing in a check. Given that credit and debit card purchases are standard fare for nearly every resale and retail store, a convenience fee would be hard to justify, but it’s still worth mentioning.
Cash Discounting
Cash discounting flips the surcharge tactic on its head: instead of charging extra to process a credit card, a business simply raises its prices across the board (enough to theoretically cover any card fees) and then offers a discount to customers who pay in cash.
The upside is that cash discounting is perfectly legal in all 50 states. Since it’s not penalizing card use but rather rewarding cash, there are no card processing rules or state laws that disallow it. The only real requirement is that the tag price on each item be the card price, and that cash discount be clearly advertised at the point of sale. There’s also, you could argue, a certain old school charm—an aesthetic that harmonizes well with local stores.
The downside is that your tag prices are slightly higher than otherwise, and that fewer customers carry cash. But given that the price hike will be minimal, the likelihood of scaring away business is small.
A Unique Angle for Consignment Stores
Whereas most businesses are stuck with one of the three methods above, consignment stores have a unique opportunity when it comes to diluting the effect of credit card fees: have consignors share the cost. Before we delve into different options though, one caveat. For consignment stores, your consignor relationship is one of your greatest assets. We’ve written about it here, but the upshot is this: be good to your consignors. However you decide to handle fees, be transparent and fair. If you communicate well, charge good prices, and are easy to work with, many consignors will be fine with a small fee. It’s one of the many ubiquitous costs of modern selling. But whatever you do, avoid being vague or coming off as nickel and diming your consignors. There’s enough of that elsewhere.
Buyer’s Fee
The first option open to consignment stores is a buyer’s fee (a misleading name, but we didn’t name it). This is a small flat rate fee, say $2, that you take from the sale price of an item before the split. Let’s say you and your consignors have a 50/50 split. If you sell a chair for $100 and charge a buyer’s fee of $2, you split $98: the store gets $49 and the consignor gets $49. The $2 fee then covers part or all of your credit card processing fee.
The advantage here is that you share the fee equally with your consignor. The downside is that, well… you’re still paying part of the credit card fee.
Consignor Fee
The second option unique to consignment stores is a consignor’s fee. This is a fee paid entirely by the consignor after the split. If you have a 50/50 split and an item sells for $100, the store gets $50 and the consignor gets $48 (if we’re still charging a $2 fee). There is, however, some flexibility. You can charge a flat rate fee to every consignor for each item sold or you can charge a fee only on items that were purchased via credit card. A card-specific fee means that consignors won’t always be charged, but it can easily feel like you’re penalizing consignors for something out of their control.
Conclusion
However you decide to tackle credit card fees, we recommend weighing all your options first. It may be that you simply pay them. That’s a perfectly common approach and one that places minimal strain on your customer and consignor relationships.
But if you do decide to pass some or all of that cost on, transparency and thorough communication will go a long way towards avoiding friction. Not only will you avoid penalties from credit card companies (who don’t have a personal relationship with you), but you’ll be able to maintain a good relationship with those who do. Make sure to include any details in your consignor agreement, and post your fees (or discounts) everywhere you should. All else being equal, customers and consignors that love supporting your store won’t be dissuaded by a few cents honestly and openly charged.
