Understanding Surcharges vs. Convenience Fees: When and How to Use Them

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When the bill arrives, customers want to pay it their way. Businesses, too, have preferred accepted payment methods. To reconcile the differences and cover extra costs, they oftentimes turn to added fees.

Businesses often consider implementing surcharges or convenience fees to help manage payment processing costs. At first glance, these fees may appear interchangeable, as both are designed to offset the expenses associated with handling card payments. However, understanding the distinction between the two is crucial, as they elicit different responses from customers and are subject to distinct regulatory guidelines.

In this blog post, we will explore the difference between surcharges and convenience fees. We’ll explain what they are, key distinctions between their usages and the regulations governing them, and when to apply each one. By gaining a clear understanding of these charges, businesses can make informed decisions that align with their goals.

 

What Are Surcharges?

A surcharge is an additional fee that a business imposes on a customer when they use a credit card for payment. This fee helps cover the costs associated with processing credit card transactions (such as merchant fees or payment gateway charges) by passing them down to the consumer. Surcharges are typically calculated as a percentage of the total transaction amount, and they’re added to the total payment amount at the moment of checkout. Surcharges are capped at either 4% of the total transaction or the cost of accepting the card—whichever is lower.

 

Why businesses add surcharges

When businesses decide to implement surcharges, the biggest factor is often their interest in offsetting their costs for processing credit card payments. By passing on some of the processing costs to customers, businesses can protect their bottom line without raising prices across the board. This practice is especially common in industries with thin profit margins, where every cent counts. The public sector, where organizations operate under rigid budget constraints, is one such example.

Also, surcharges can incentivize customers to choose alternative payment methods that incur lower processing fees, such as ACH, ultimately reducing the overall transaction costs for the business. This strategic approach allows businesses to manage their expenses more effectively while providing transparency about the costs associated with different payment options. This way, they not only safeguard their financial health but also foster trust and openness with their clientele.

 

Examples of common surcharges

Surcharges can look different depending on the industry and its services, but can only be applied to credit card payments. For instance, a restaurant may add a 3% surcharge to the total bill if a customer pays with a credit card. Similarly, an online retailer might opt to impose a fixed surcharge of $1.50 for each credit card transaction. Service-oriented businesses, such as utility companies, are also known to apply surcharges to cover the costs of credit card processing for bill payments.

By implementing surcharges, businesses can better manage the expenses associated with credit card processing and maintain financial stability.

 

What Are Convenience Fees?

A convenience fee is an additional amount charged to customers who want to use a payment method or payment channel that’s different from the standard ones the business accepts. Convenience fees can apply to more than just credit card transactions—for example, online payments or phone payments can be subject to the charge.

This fee is designed to cover the extra costs associated with offering alternative payment options, such as credit card payments for services that are typically paid for by ACH, check or cash. Unlike surcharges, convenience fees are not always tied to the transaction amount and can be a fixed fee or a percentage of the payment.

 

Why businesses charge convenience fees

Convenience fees are a practical way to help organizations manage costs associated with diverse payment methods while offering customers the flexibility they want.

Businesses implement convenience fees to offset costs associated with processing alternative payment methods. This way, they can provide a better customer experience without being unduly burdened financially.

Charging convenience fees can also be a strategic decision. It’s a way to guide customers towards preferred payment methods that incur lower costs for the business. By incentivizing the use of certain payment options, businesses can make their payment processing as cost-effective as possible.

 

Examples of common convenience fees

Since convenience fees are usually applied when customers choose to use a payment method that the business does not traditionally accept, they can be found in many different contexts.

For example, if a utility company typically accepts payments in person or by mail, they may charge a convenience fee for payments made online or over the phone. A concertgoer might incur a convenience fee for an online ticket purchase if the standard payment method is cash at the box office. Likewise, many municipalities charge convenience fees for citizens that choose to pay their taxes by credit card, as opposed to ACH or eCheck.

In any case, convenience fees are accepted by customers willing to pay a little extra for the privilege of using their preferred payment method and channel.

 

Key Differences Between Surcharges and Convenience Fees

While both surcharges and convenience fees are designed to counterbalance the added costs businesses incur from processing payments, they aren’t applied nor perceived the same way.

Surcharges help businesses lessen the financial burden of processing credit card payments, while convenience fees are intended to cover only those extra costs that come with alternative payment options. But there are additional differences to consider:

Surcharges

  • Are charged by the credit card issuer to the merchant, who then chooses to pass the cost down to the consumer
  • Can’t be applied to debit or prepaid card payments
  • Are typically a fixed price and are illegal in some states

Convenience Fees

  • Are charged by merchants directly to consumers
  • May apply to any payment method, not just credit card transactions
  • Are often calculated based on a certain percentage of the purchase cost
  • Must be disclosed at the time of purchase

One critical distinction between surcharges and convenience fees that businesses need to understand is the difference in customer perception.

Convenience fees are generally viewed more favorably by customers. They can understand and even appreciate that they are being charged extra in exchange for the added benefit (or convenience) of using a payment method that the business does not traditionally accept. There’s greater transparency and even a degree of choice in the matter.

By contrast, surcharges are charged by credit card issuers to the business and are not always disclosed. Feeling that they are absorbing an undue cost, customers tend to have a negative perception of surcharges.

 

When to Use Surcharges vs. Convenience Fees

In some cases, it may be more appropriate to use a surcharge than a convenience fee, or vice versa. Knowing the difference is important for businesses that are evaluating which fee structure to implement.

Consider these key factors to decide when to use surcharges versus convenience fees:

  • Business goals: Determine which fee structure better aligns with the company’s objectives. Convenience fees might be preferable if the goal is to offer additional payment methods without absorbing extra costs. Surcharges might be considered if the aim is to recoup the costs imposed by credit card issuers.
  • Customer perception: Surcharges may create a negative perception as they are sometimes seen as “hidden” costs passed on by credit card issuers. Convenience fees tend to be viewed more positively by customers, who enjoy the benefit of using alternative payment methods.
  • Availability: Not every payment processor allows businesses to offer both convenience fees and surcharges. It’s important to investigate the availability of each fee structure.
  • Required disclosures: Convenience fees must be disclosed at the time of purchase and are generally applied to any payment method, not just credit cards. Surcharges must be disclosed before purchase to comply with legal requirements.

Additionally, there are different rules and regulations for surcharges and convenience fees that businesses should consider before choosing which to use.

 

Rules and Regulations for Surcharges vs. Convenience Fees

Merchants that charge either type of fee should be familiar with the following legal frameworks:

These measures aim to increase transparency and fairness in financial transactions by regulating how businesses can impose surcharges and convenience fees.

 

Legal guidelines for surcharges vs. convenience fees

Surcharges are not legal in all states and must be deemed “reasonable” where they’re allowed. Customers, card brands and acquirers must be given prior notice before the surcharge is applied. The surcharge must again be disclosed on the customer’s receipt. These fees are typically charged by the credit card issuer to the merchant, which then chooses to pass the cost down to the consumer.

Convenience fees must be disclosed to customers before they complete the transaction. They are to be calculated based on a certain percentage of the purchase cost and clearly marked at the time of purchase. The regulations concerning convenience fees are not as complex.

 

Best practices for adhering to legal standards

As we mentioned, legal standards regarding surcharges and convenience fees can vary by situation or state. But here are a couple rules of thumb businesses might follow when implementing them:

  • Follow disclosure guidelines. Clearly disclose any surcharges or convenience fees to customers before completing the transaction. Present all fees in a way that’s transparent and understandable.
  • Charge fair fees. Ensure that any surcharges or convenience fees are reasonable and in line with legal requirements. Avoid imposing excessively high fees that could be perceived as unfair or exploitative.

It’s important to stay informed about regulations and customer preferences when deciding between surcharges and convenience fees. By prioritizing compliance and transparency, businesses can help mitigate the risk of legal challenges and strengthen customer relationships.

 

Choosing the Right Fee

Convenience fees and surcharges aren’t equal in the eyes of the law or the customer. To understand which fee structure an organization can use, businesses must consider both their ultimate goal in adding a fee and the legal implications that come with each.

Surcharges, while potentially increasing revenue, require careful navigation of state laws and a commitment to transparency to avoid alienating customers. Convenience fees, while often simpler to implement, must be clearly communicated and justified to be perceived as fair and necessary. By applying the right fee structure, businesses can offset expenses while preserving customers’ trust.

CSG Forte offers convenience fee pricing to support your payments and customer needs. Contact us to learn more.