How payment fee structures affect your revenue and customer relationships
Should you charge customers extra for using credit cards or only when they choose non-standard payment channels? This decision affects your profit margins, legal compliance and customer satisfaction in ways that many businesses discover too late.
Running a business means keeping a close eye on every cost, especially payment processing fees that can affect your profits. These fees also impact customer satisfaction with consumers saying they avoid businesses that charge extra for using a card. That’s a large number of potential customers lost over fees alone.
This article shares the difference between surcharges and convenience fees, when to use them and how to apply them without losing customer trust.
Five Primary Differences Between Surcharges and Convenience Fees
Understanding the distinctions between surcharges and convenience fees helps you select the most suitable fee approach for your business.
Fee Trigger
Surcharges are fees applied specifically when customers choose to pay with credit cards, directly linked to the payment method itself. They represent a pass-through of the merchant’s processing costs for accepting cards.
Convenience fees are triggered by the payment channel or method used for transaction processing. They apply when customers opt for alternative or non-standard payment channels that create additional operational costs for your business, such as paying by phone when in-person is your standard method.
Fee Structure
The structure of surcharges typically follows a percentage-based model, usually between 1-3% of the total transaction amount, mirroring the processing costs merchants incur from card networks and payment processors.
These percentages must accurately reflect your actual costs to remain compliant in many jurisdictions. Convenience fees generally follow a fixed flat-rate structure (such as £2.50 per transaction), making them simpler to communicate to customers and more predictable regardless of purchase size.
However, in digital environments, some businesses may apply percentage-based convenience fees for operational simplicity.
Applicability
Surcharges apply predominantly to credit card transactions and cannot be applied to debit cards in most regions. This limitation exists because credit cards typically carry higher interchange fees than debit transactions, making them more costly for merchants to process.
Convenience fees offer broader application flexibility, extending across various payment methods within particular payment channels or circumstances. You can apply them regardless of whether customers use credit cards, debit cards, digital wallets or other payment instruments—the key factor is the non-standard channel through which payment occurs.
Legal Status
Regulations on surcharges and convenience fees vary considerably by jurisdiction:
- European Union: Under PSD2 legislation, surcharges are banned on most consumer card payments but may be allowed on commercial card transactions in some cases.
- APAC Region: Countries vary widely; Australia limits surcharges to the actual cost of acceptance; Singapore requires transparency; Japan has few explicit regulations.
- Latin America: Regulation varies by country. In Brazil, surcharges are generally prohibited under consumer protection laws. Mexico allows some fees but requires clear disclosure. Argentina permits limited surcharges, though pricing transparency and compliance with local consumer laws are required. Merchants must assess each market individually to avoid penalties.
Card Network Rules
Major card networks have their own requirements:
- Surcharges: Visa and Mastercard require merchants to register and provide 30 days’ advance notice before applying surcharges. American Express has adopted similar policies following regulatory action.
- Convenience fees: Generally permitted by card networks but must follow specific rules around clear disclosure and consistent application across all relevant transactions.
Convenience fees face fewer network-imposed restrictions but must adhere to principles of clear disclosure, consistent application across qualifying transactions and reasonable proportionality to the service provided.
Networks may also specify permitted payment channels and scenarios for convenience fee application.
Diving into Surcharge Fees
A surcharge is an additional fee that is added when customers pay with credit cards. It helps cover the processing costs. These fees are typically a small percentage of the transaction amount and must be displayed to customers before they pay.
The rules for these fees vary by location; it’s important to check your local laws and regulations before applying a surcharge.
Adding surcharges does change how customers shop. Businesses can see about a 10% drop in same-store debit and credit sales after adding surcharges. While they help offset costs, they also reduce your overall sales.
You’ll commonly find surcharges at:
- Restaurants
- Convenience stores
- Gas stations
- Small retailers
- Service providers
These fees appear as separate items on receipts, showing customers what they’re paying for their payment choice.
Surcharges can help manage your processing costs, but you should consider how they might affect customer loyalty. Being transparent and clear about these fees helps minimise negative reactions.
The Pros and Cons of Surcharge Fees
Implementing surcharge fees offers significant financial benefits for your business, helping to offset the substantial costs associated with accepting credit card payments in a transparent way:
- Cost recovery: You can recoup up to 100% of your credit card processing fees, directly improving your bottom line without raising overall prices.
- Transparent fee structure: Surcharges clearly show customers the cost impact of their payment choices, potentially encouraging cash or debit card use.
- Competitive pricing: By separating payment costs from base prices, you can maintain more competitive advertised pricing while preserving margins.
- Simple implementation: Most modern payment processors offer built-in surcharge functionality that automatically calculates and displays the appropriate fees.
While surcharges provide financial benefits, they also present significant challenges that can impact customer relationships and your business reputation:
- Customer resistance: Many shoppers react negatively to surcharges.
- Competitive disadvantage: In markets where surcharges aren’t standard practice, implementing them may drive customers to competitors who absorb these costs.
- Regulatory complexity: The varied legal landscape across regions requires ongoing compliance monitoring with some jurisdictions prohibiting surcharges entirely.
- Administrative burden: You’ll need to manage proper disclosure, maintain surcharge registrations with card networks and ensure your point-of-sale systems properly track and report these fees.
Explaining a Convenience Fee
A convenience fee is an additional charge that businesses apply when customers choose to pay using a non-standard or less preferred channel. This helps to offset the added time, cost or inconvenience of handling these alternative payment options.
Surcharges apply specifically to credit card use; convenience fees cover the costs of offering payment channels beyond your standard or preferred channel, such as accepting payments in person at an office when you prefer online payments..
These fees usually come as flat rates. In some online contexts, they might instead be a percentage of the transaction. For example, a college might charge a £3 flat fee for online tuition payments.
You’ll most often see convenience fees in industries where alternative channels aren’t the norm:
- Government agencies charging for online tax or licence payments
- Schools adding fees for online tuition payments
- Utility companies charging for phone or web bill payments
- Mortgage services adding fees for online or phone payments
You must disclose convenience fees before a transaction is complete. This transparency is good business and often legally required. These fees must also be applied consistently.
The Pros and Cons of Convenience Fees
Before implementing convenience fees, weigh the benefits and potential customer reactions:
- Channel cost recovery: You can offset the operational expenses of maintaining non-standard payment channels without affecting your base pricing structure.
- Flexible application: Unlike surcharges, convenience fees can be applied across various payment methods and aren’t restricted to specific card types.
- Predictable revenue: Flat-rate convenience fees provide consistent revenue regardless of transaction size, making financial planning more straightforward.
- Broader legal acceptance: Convenience fees face fewer regulatory restrictions compared to surcharges, making them viable in more jurisdictions.
- Customer choice preservation: You maintain multiple payment options while ensuring each channel covers its associated costs.
However, convenience fees can create customer friction and competitive challenges that may impact your business relationships and market position:
- Customer perception issues: Many consumers view convenience fees negatively, particularly when paying through channels they consider standard, such as online payments.
- Channel deterrence: Fees may discourage customers from using alternative payment channels, potentially reducing accessibility and customer satisfaction.
- Competitive pressure: Markets where convenience fees aren’t standard practice may see customer migration to competitors offering fee-free alternatives.
- Implementation complexity: You must consistently apply fees across qualifying transactions while maintaining clear disclosure requirements and proper system configuration.
- Revenue impact: While fees offset channel costs, they may reduce overall transaction volume as customers seek fee-free alternatives or abandon purchases entirely.
Be sure to check with local laws and regulations, as requirements and rules vary by country and jurisdiction. While convenience fees help offset the cost of offering additional payment options, they might also cause customer pushback.