May 8, 2023
In one of our recent blog postings, we discussed two important considerations in applying surcharges to credit card sales: 1) Is it legal in your state? 2) Is it a smart decision? Today we’ll look at this tactic from your customer’s perspective and the impact on your business.
Credit cards are an integral part of commerce and are not going away. In fact, credit card use is expanding with the addition of alternate payment methods such as Apple Pay and PayPal. Broadband has made credit card transactions fast and reliable and EMV transactions make the bank responsible for fraud. Cash transactions “slow down the line.”
While there are cash-oriented businesses such as nail salons and convenience stores, most business today is conducted by credit and debit cards. Studies show that 80% of consumers prefer card transactions over cash. Do your research; what percent of your business is done by credit and debit cards? A typical business likely will reflect the 80% statistic. There are many reasons customers prefer credit cards and most consumers do not carry substantial cash on them.
Studies show a wide differential between the average cash sale ($22) and the average card transaction ($122). A key reason is that customers using credit cards are not limited to their cash on hand. Consumers also use the grace period and financing to buy now and pay later as evidenced by more than $780B in outstanding credit card debt.
Retail is competitive; it’s a daily fight to capture a greater share of your market. Consumers vote with their wallet on where they will spend their money. While a customer may quietly accept paying the additional charge the first time, surveys show that more than 56% may not return to a store that imposes this fee. While this may not apply in your situation, it’s safe to assume that at least some of your clientele will take their business to your competition or buy online. How many customers can you afford to lose just to recover a few percentage points? Most people will not express their sentiments verbally; they will quietly accept the surcharge and make subsequent purchases elsewhere.
Data indicates that 67% of card transactions are debit cards. Starting in 2011, the Federal Reserve limited interchange fees on debit cards to $.21 + .05%. A $100 transaction will cost approximately $.26. With debit cards accounting for over 65% of card transactions, is surcharging worth the risk? And as we previously noted, surcharging debit cards likely is not legal. With the current technology, customers self-enter their card in the terminal (or use touchless), making it almost impossible to separate credit from debit.
With a plethora of competition from big box stores and online merchants, customers have plenty of choices. Destination stores are a thing of the past. Marketing data shows that the cost of replacing a customer can be 20-40 times higher than retaining an existing one. Customer acquisition cost (CAC) is a key expense to all retailers. Maintaining and growing the customer base is essential to keep up with customer attrition and broadening your base. If your CAC is $70 (moderate), is recovering $3.00 on a $100 sale worth the risk?
While adding a surcharge for credit card payments is tempting, the consequences to your business may have a substantial negative impact. With 80% of customers using credits cards, the vast majority of your clients are being “punished” for using a commonly accepted form of payment. Businesses risk losing customers if they implement this policy. Credit card sales exceed cash sales by a factor of 5 times. Statistically, credit cards are a business driver, not a financial burden. Ask yourself, “What would my revenue be without credit cards?”
It certainly is a good idea to “take a sharp pencil” to your expenses. Consider all expense centers as targets for savings and focus on turnover to assure one of your highest investments, inventory, is in line with needs. Remember there are expenses associated with cash as well, such as daily balancing, shortages, bank depositing, counterfeit money, and armored car service. Periodically, shop credit card service providers to assure you are getting the best rate. And remember, focusing on increasing sales solves many issues and yields long-term results.
For more information, check out this great resource