What is a Credit Card Surcharge? Understanding Costs and Benefits for MSPs

Credit card processing fees cost anywhere between 1.15% to 4% per transaction, cutting your MSP’s profit margins. These costs build up quickly with several clients and monthly recurring payments, impacting your bottom line in the long run.

According to The Ascent, merchants incurred $135.75 billion in processing fees in 2023. Businesses accepting credit card payments find customer surcharging a viable solution for managing transaction costs.

Implementing credit card surcharges offers MSPs a strategic cost advantage, but you must consider the legal implications and comply with local regulations. 

MSPs must communicate surcharges to clients and incorporate them into their payment strategy.

This article comprehensively discusses credit card surcharges, their definitions, and essential legal considerations. 

We will also examine potential benefits, possible drawbacks, and best practices for effectively implementing credit card surcharges in MSP operations.

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What is a Credit Card Surcharge?

A surcharge is an extra fee MSPs add to their clients' bills when they pay with a credit card. It helps them cover the high cost of processing credit card payments. 

MSPs can pass either on a portion or the full transaction fee levied by credit card companies. 

Credit card transaction fees vary depending on the type of credit card your client uses, as well as your payment processor/gateway. It’s important to consider these and local regulations when planning a surcharging policy.

For example, if a client pays $1000 using a credit card with a processing fee of 3.5% per transaction, the MSP can add a surcharge of $35 to cover these costs. The client's total bill would then be $1035.

Credit card surcharging is an option to reduce the burden of processing fees if most of your clients are paying through credit cards.

Surcharging helps MSPs cover credit card fees by passing on the fee partially or fully to their clients. While surcharging only partially covers the associated costs, it does allow the MSP to pay processing fees without negatively affecting its bottom line. 

Let’s look at an example to understand how surcharges are applied to offset credit card processing fees:

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In the example above:

If an MSP does not surcharge customers, it absorbs the $35 fee, reducing its revenue to $965. 

With a surcharge, the client pays an additional $35 to cover the credit card processing fee. The MSP's net revenue is approximately $998.74, much closer to the original invoice amount.

Customer Surcharge vs. Cash Discounts vs. Convenience Fees

Comparing customer surcharges, cash discounts, and convenience fees shows that each method is helpful for a specific purpose and impacts your business differently.

A customer surcharge is an additional fee that helps offset the costs associated with credit card processing fees. 

A cash discount is a reduced price offered to customers who pay through alternate payment options instead of using credit cards or within a set time limit. It encourages clients to pay early or pick payment methods like ACH, which do not incur high processing fees. 

A cash discount is separate from physical cash payments, prevalent in B2C retail payments. The price is reduced when choosing a payment option that levies a lesser fee on the MSP.

According to Commercial Bank of California, ACH payment fees are lower than credit card processing fees. It is a flat fee that ranges from $0.20 to $1.50 per transaction.

For instance, if a client has an invoice amount of $1,000 and chooses to pay via ACH instead of a credit card, their payment fees will be at a flat rate of $0.25 instead of $35 for the credit card processing fee, which is applicable at 3.5%. 

If the MSP offers a 2% cash discount for ACH payments, the client would only need to pay $979.75.

‍Note: We are using an example of $0.25 ACH transaction fees offered by FlexPoint to MSPs using our platform for invoicing and billing.

Let’s look at an example to understand how applying cash discount can help MSPs offset credit card processing fees:

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In the example above:

If an MSP does not offer a cash discount to customers and they pay through credit card, the MSP absorbs a $35 fee, reducing its revenue to $965. 

With a cash discount, the MSP can encourage the client to pay through an alternative payment method with lower fees, like ACH. 

Even with a 2% discount and a flat fee for ACH payment, the MSP's net revenue is approximately $979.75, much higher than if the client makes a credit card payment.

In contrast, a convenience fee is an extra fee for offering any payment method according to the client’s choice. It would be a payment method not typically offered by the MSP, such as a digital wallet (e.g., PayPal). The convenience fee helps cover the additional costs associated with providing the convenience of the desired payment option.

For instance, an MSP charges a flat fee of $10 for PayPal payments on a $1,000 invoice. The client opts to pay with PayPal, so the total amount they are billed is $1,010. 

PayPal charges a processing fee of 2.99% of the transaction amount plus a fixed fee of $0.49. So, the client pays $1,010 to pay through PayPal using a digital wallet, including convenience fees. After deducting the PayPal digital wallet processing fee of $30.68, the MSP earns $979.32.

Let’s look at an example to understand how applying convenience fee can help MSPs:

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In the example above:

If the MSP does not charge a convenience fee for offering clients the digital wallet payment option, it will absorb $30.39 as a PayPal processing fee, reducing its net revenue to $969.61. 

However, by charging a $10 convenience fee, the MSP increases the total amount charged to the client through a digital wallet. This helps offset the digital wallet processing fee, increasing the MSP's net revenue to $979.32.

Convenience fees help MSPs cover the costs of offering alternative payment methods while maintaining better revenue.

Here is a comparison of Customer Surcharges vs. Cash Discounts vs. Convenience Fees to help you decide which fits your MSP’s payment strategy best:

Customer Surcharge vs. Cash Discounts vs. Convenience Fees

Legal Considerations and Regional Variations for Credit Card Surcharging

Implementing credit card surcharges is complex as local laws govern it. These regulations differ considerably across various states. MSPs must consider the legal implications to prevent fines or penalties.

MSPs must ensure transparency during surcharging to avoid legal repercussions and maintain customer trust. 

You must carefully research the applicable laws for the specific location or take legal assistance to ensure compliance and avoid potential penalties.

Here are key pointers to consider when implementing surcharges on credit card transactions:

1. State-Specific Regulations:

To comply with local laws, MSPs must understand state regulations regarding credit card surcharges. 

Some states, such as Connecticut, Massachusetts, Maine, and Oklahoma, prohibit surcharges. 

Others allow surcharging but impose strict disclosure requirements and cap the maximum surcharge percentage at 4%. 

The upper limit of surcharge allowed in Colorado is 2% and cannot exceed the actual payment processing cost.

These stringent regulations protect consumers from unfair or misleading additional costs.

 MSPs must indicate the surcharge amount on their invoices to avoid fines and penalties. Non-compliance also impacts customer trust.

Check out our detailed guide: Navigating Credit Card Surcharge Laws: A State-by-State Guide for MSP.

2. Disclosure Requirements:

The US states that allow surcharging impose strict regulations on merchants. 

MSPs must disclose the surcharge amount to clients before completing a transaction. 

Some states also have specific disclosure requirements related to surcharging laws. 

For instance, Maine and New York have additional laws requiring merchants to disclose the cost of paying with cash versus credit cards.

Adequate notifications should be provided to ensure that clients understand the surcharge before proceeding with their payment. 

Furthermore, invoices and receipts must also detail the surcharge amount, reinforcing transparency and compliance with regional laws. 

Failure to meet disclosure requirements can lead to immediate fines of $1,000. Visa further announced penalties of up to $25,000 per month on April 15, 2023. 

Legal repercussions lead to additional expense and loss of customer trust. MSPs must maintain clear communication regarding surcharges throughout the entire transaction process.

3. Cap Limits:

Regulators have implemented cap limits on the percentage merchants can charge back to customers paying through credit cards. These limits are set at a percentage of the actual cost the merchant incurs for processing the payment. 

The regulation ensures that surcharges remain reasonable and do not excessively burden clients. It also ensures that clients are not penalized for using credit cards, while MSPs can recover their processing costs.

For example, the allowable surcharge in states like New York is capped at 4%, providing merchants flexibility while protecting consumers from exorbitant fees.

The cap in Colorado is more stringent, allowing surcharges of only up to 2%, whereas in Illinois, it is limited to 1%. 

The surcharge must match the actual cost of processing the payment. The regulation aligns the cap with processing fees to help maintain transaction transparency. 

Failure to adhere to these caps can lead to legal action and fines.

4. Debit Card Restrictions:

Surcharging debit card transactions is prohibited in all states in the United States due to federal regulations established by the Durbin Amendment of the Dodd-Frank Wall Street Reform and Consumer Protection Act. This amendment explicitly prohibits merchants from imposing surcharges on debit card transactions.

The prohibition on debit card surcharging applies to all 50 states and U.S. territories. 

It is intended to protect customers and ensure merchants do not impose additional fees, as debit card processing costs are lower than credit cards.

The Benefits of Implementing Credit Card Surcharges

Implementing credit card surcharges can be a strategic move for MSPs, helping them improve profit margins while maintaining competitive service pricing. 

Additionally, surcharges help reduce the financial burden of accepting credit card payments, which can impact overall revenue.

The key benefits of implementing credit card surcharges are:

1. Reduced Processing Costs:

Surcharges help offset credit card payment processing charges, preventing an impact on MSPs' profit margins. This is a strategic approach to maintaining their bottom line without impacting client relations.

For example, if an MSP incurs a 3.5% processing fee on a $1000 transaction, they must pay $35. 

By implementing a 3.5% surcharge, the MSP can cover the processing fee and earn their expected profit.

2. Improved Cash Flow:

Unpredictable cash flow due to variable payment processing fees makes financial planning difficult. Implementing surcharges on credit card payments eases the financial strain of processing fees, improving cash flow for businesses.

For instance, if an MSP generates $1,000,000 in annual revenue, with 50% of payments made via credit card and the processing fee is 3.5%, the MSP would pay $500,000 × 3.5% = $17,500 in costs annually. 

By implementing a surcharge, you can retain $17,500, directly improving cash flow and providing additional funds for business operations or investments.

3. Simplicity in Transactions:

Absorbing credit card fees can complicate accounting and financial reconciliation, as MSPs must track and account for these expenses separately. 

Without surcharges, MSPs may need to account for processing fees in their pricing structure, leading to unexplained charges in the fees.

By applying a surcharge, MSPs can maintain a straightforward pricing model. Clients know the base price for services and can pick a payment method that suits them. Additional fees are transparently disclosed. It also makes reconciliation processes more straightforward, saving time and reducing accounting errors.

For instance, if an MSP offers a service for $10,000 without surcharges and a client pays with a credit card, the MSP might receive only $9,650 after a 3.5% processing fee, requiring them to either adjust their pricing or absorb the loss. 

By implementing a surcharge, the client pays $10,350, including the surcharge, on which a 3.5% processing fee will be applicable. The MSP will receive $9,987.75 after paying $12.25 as processing fees.

4. Market Competitiveness:

Surcharging allows MSPs to keep their base prices competitive. Instead of raising prices for all clients, you can implement a surcharge that only affects credit card users.

Communicating about the surcharge helps MSPs maintain pricing transparency and retain clients. It allows them to pick alternative payment methods to pay the base price or use a credit card by bearing the processing cost.

5. Encouraging Other Payment Methods:

MSPs can enable clients to opt for alternative payment methods and even incentivize them. 

Methods such as Automated Clearing House (ACH) transfers or direct bank transfers incur lower processing fees. It enables MSPs to alleviate the financial burden associated with credit card processing.

For instance, when clients are informed about the surcharge added to their bill for using a credit card, they may be more inclined to use ACH payments with a lower flat fee.

Furthermore, MSPs can incentivize clients to pay by Automated Clearing House (ACH) transfers or direct bank transfers. 

MSPs can prevent checks and other manual payment methods by offering discounts or rewards for using these low-fee alternative payment methods. It reduces processing costs and ensures timely payments to maintain an uninterrupted cash flow.

The Drawbacks of Implementing Credit Card Surcharges

Surcharging helps manage costs and encourages alternative payment methods, but it can also be challenging for MSPs. 

Customers may feel frustrated and switch to competitors if the additional fee is not explained correctly. 

According to Paystand, 71% of consumers prefer businesses that do not pass on credit card fees. 

Adopting surcharging may result in lost sales for MSPs as clients may seek out competitors who do not impose such charges. 

Additionally, MSPs must comply with local laws and PCI DSS, resulting in administrative burdens and costs for MSPs. Any errors in surcharge calculations may lead to legal consequences and damage your MSP’s reputation.

You must consider the following drawbacks while implementing credit card surcharges:

1. Transparency Issues:

According to Deloitte, 84% of B2B customers find it challenging to get accurate pricing information from suppliers. If not clearly communicated upfront, surcharges can lead to customer dissatisfaction and a perception of hidden fees. MSPs must adopt a transparent approach to prevent distrust. 

You must inform clients about the surcharge before they opt for credit card payments so that they can select a low-fee payment method. Make sure you understand why the surcharge exists.

2. Customer Retention:

According to Hokodo, 86% of B2B customers consider payment terms a key factor for vendor selection, and 83% would not buy from a vendor if their preferred payment option is unavailable. 

Clients used to fee-free transactions may be put off by surcharges and may reconsider working with you. It leads to a loss of customers and revenue.

MSPs must clearly explain to them that the fees are a cost of convenience when paying through their credit card. Alternative payment options must also be made available to prevent customer churn.

3. Potential Legal Risks:

MSPs can face legal challenges and fines if surcharges are not implemented in compliance with regional laws. Many jurisdictions have specific regulations governing the imposition of surcharges on credit card transactions, including limits on the amount that can be charged and requirements for transparency. 

Failure to adhere to these regulations can subject MSPs to investigations, potential lawsuits, and financial penalties ranging from $1,000 to $150,000. Furthermore, non-compliance can damage an MSP's reputation and reduce customer trust.

4. Operational Complexity:

Implementing credit card surcharges requires MSPs to manage legal and logistical challenges. It is difficult to keep up with different companies' fluctuating credit card processing fees and surcharging regulations across different jurisdictions. 

To ensure compliance, MSPs must thoroughly research and stay informed about these regulations. Managing the legalities requires significant time and resources.

5. Client Backlash:

MSPs risk negative customer feedback and lower satisfaction rates if your clients feel your pricing model lacks transparency. 

According to Digitalzone, 94% of B2B customers expect transparent pricing. If your clients view surcharges as hidden costs instead of justified fees for their chosen payment method, this can lead to mistrust and damaged relationships. 

They must be adequately informed about the surcharge before payment. This includes clearly mentioning the surcharge amount on the invoices.

6. Regulatory & Legal Compliance:

Surcharge regulations are updated often, and some states prohibit or cap the percentage of the transaction amount. It is difficult for MSPs to keep track of these regulations and make necessary adjustments to the pricing models.

Additionally, compliance with PCI-DSS is essential when processing payments and storing customer information. According to MSP Success, 72% of MSP clients risk hefty non-compliance fees of up to $500,000 per violation. 

MSPs must allocate resources to stay up-to-date with these regulations, which includes tracking industry news, engaging legal counsel, or employing compliance professionals. It adds to the MSP's operational costs.

Best Practices for Implementing Credit Card Surcharges in MSPs

MSPs must mitigate these challenges to implement surcharging without impacting client relations and profitability. 

Here are some best practices to consider when implementing credit card surcharges:

1. Transparent Communication:

MSPs must communicate their surcharging policies to clients. 

The communication must include the applicable surcharge if the client pays through a credit card. It can be added to the client contract, mentioned on the invoice, and displayed on the payment portal before the client makes payment.

2. Compliance Checks:

MSPs must ensure compliance with state and federal laws before implementing surcharges. It includes:

• Notifying credit card networks at least 30 days in advance before starting to apply surcharges.
• The surcharge must be itemized on customer receipts or invoices to ensure transparency about the additional cost incurred for credit card payments.
• The surcharge cannot exceed 4% of the transaction amount or the actual cost of accepting credit card payments. You must also check local restrictions on the maximum surcharge allowed.

3. Technology Integration:

MSPs should use payment processing software that automatically calculates and applies surcharges to ensure accuracy and compliance. It reduces the risk of human error in surcharge calculations, preventing incorrect billing and customer dissatisfaction. 

Automated systems also keep up with the latest regulatory changes, helping MSPs comply with state and federal laws on surcharges. It itemizes surcharges on invoices, enhancing transparency and maintaining client trust.

4. Client Education:

MSPs must educate clients on the cost implications of different payment methods, including credit card surcharges. 

You must clarify that the surcharge covers the convenience of paying through a credit card and provide information on alternative payment options that incur lower charges.

5. Feedback Mechanisms:

Allow clients to voice any concerns or issues regarding surcharges through a feedback mechanism. You can use a branded client portal with built-in communication systems to gather feedback and improve the process.

6. Regular Policy Reviews:

MSPs must continuously review and update their surcharging policies to comply with regulatory changes. 

Additionally, gathering client feedback provides valuable insights that help adapt strategies to maintain client trust. The proactive approach helps avoid legal pitfalls by maintaining transparency and fairness in pricing.

7. Customer Service Training:

Training your customer service teams effectively helps them handle inquiries and complaints about surcharges. It includes the following:

• Understanding Surcharges: Team members must clearly explain the reasons for credit card surcharges to customers.  
• Clear Communication: Train representatives to communicate where clients can find surcharge information on invoices or contracts.  
• Problem-Solving: Customer service teams must offer alternative payment options.  
• Resource Availability: Ensure customer service representatives can access up-to-date surcharge policies and regulatory information.

8. Audit and Reporting:

MSPs should implement a robust payment auditing process that tracks each surcharge transaction, including the surcharge amount, transaction date, and payment method. Keeping detailed records helps ensure compliance and identify areas for improvement.

Regular reporting uncovers customer behavior trends and the impact of surcharges on customer satisfaction. MSPs can use the insights to make pricing decisions, adjust strategy for profitability, and build trust with clients.

Comprehensive documentation ensures regulatory compliance, verifies adherence to surcharge guidelines, and safeguards against disputes.

How to Use MSP Payment Software like FlexPoint for Customer Surcharging

Payment processing software helps implement credit card surcharging. MSPs can benefit from automatic surcharge calculation, detailed transaction tracking, and customizable invoicing options. It allows setting up surcharge policies and customizing them based on card network and location.

FlexPoint offers a robust payment solution for MSPs that efficiently and accurately implements customer surcharges.

The platform helps automate the calculation of surcharges based on local regulations and clearly mentions them on the client invoice.

You can also use it to offer alternate payment options while maintaining transparency in payment fees and surcharges.

The key features of FlexPoint are:

• Automated Billing to ensure that surcharges are accurately calculated and applied to client invoices without manual intervention. It streamlines the credit card payment process by applying the surcharge to each payment by default.‍
• Built-in Compliance Tracking allows MSPs to stay updated on the latest regulations regarding surcharging. It automatically integrates relevant compliance guidelines and adjusts client invoices.‍
• Credit Card Surcharge Per Customer. You can turn off or on automatic surcharging to cover specific clients' credit card processing fees.‍
• Easy Communication through branded client portals, as clients have all their payment-related details on a single dashboard. This helps maintain transparency, and clients can raise concerns or seek clarification through the same portal.
• ‍Robust Reporting Capabilities help track payments based on their status. Comprehensive reports help MSPs make informed decisions about their surcharge policy and absorb credit card processing fees for loyal and long-standing customers.

Conclusion: Optimizing Credit Card Payment Strategies with FlexPoint

Surcharging helps MSPs stay profitable by offsetting the cost of collecting payments through credit cards. 

However, adhering to legal requirements includes notifying credit card networks and itemizing surcharges on receipts. Educating clients on payment options and clarifying surcharges improves the overall payment experience. 

Using MSP-specific payment processing software like FlexPoint ensures accurate surcharge implementations. From automated billing to accurate calculations and ongoing compliance with regulatory changes, FlexPoint helps MSPs stay profitable while offering customers a convenient payment experience.

FlexPoint helps MSPs automate surcharging through passing fees and split fee options. An accurate credit card surcharge is applied by default, but you can also disable it for specific customers. 

The platform also encourages clients to pay via ACH, which costs only $0.25 per transaction compared to the higher fees associated with credit card payments. 

For instance, Texas-based Excellent Networks saves $10k+ per year in credit card fees by switching from check payments and invoicing using ConnectWise to Flexpoint’s client portal with ACH payments. 

FlexPoint’s Interchange Plus pricing model lowers credit card processing rates over traditional tiered pricing.

Leverage FlexPoint's automated solutions to manage your MSP’s payment strategies effectively.

Schedule a personalized demo today to explore how our tools can help you optimize credit card surcharges and enhance financial management.

Additional FAQs: Understanding Credit Card Surcharges

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