With inflation driving up operating costs recently, more life safety companies are opting to add surcharges to customers that pay by credit card. Surcharges are simply fees that a business can add to recover its merchant fee expenses.
Say you have a customer that pays a $100 quarterly monitoring invoice, and your company has adopted a 3% surcharge amount to cover your underlying cost to run card payments. In this example, your customer will need to pay $103 to cover both the service and the 3% surcharge.
The Pros and Cons of Surcharging
There’s really one PRO to surcharging: reducing expenses by passing through the merchant fee to your subscribers. That improves your bottom line, at least in the short run.
Surcharging CONS include:
- Lost goodwill for being singled out—Surcharging singles out card payers, so can erode the goodwill you’ve built over the years. They may feel ‘nickel & dimed.’
- Potential loss of customers—While surcharges are usually small and unlikely to cause customer cancels, it could happen, and has happened.
- Competitive disadvantages—If your competitors don’t also surcharge, you’ll be at a competitive disadvantage.
- Difficulty of compliance—As further explained below, there are many elements to remaining compliant with state and credit card industry laws and regulations.
Alternatives to Surcharging
There are a few options that should be considered before deciding to surcharge customers.
The main alternative to surcharging is to simply raise rates for ALL subscribers, regardless of their payment method. This has the big advantage of spreading cost recovery across your entire account base. If you have $100,000 in monthly RMR, and 50% of that is paid by credit card, a 3% surcharge will net you $1,500/month ($50k x 3%). But a 3% across-the-board rate increase nets you $3,000/month, and avoids some of the above cons, e.g. being singled out. Many of Cornerstone’s customers have implemented broad rate increases in recent years, to help offset the impact of inflation. The added advantage of this method is that it is repeatable; it can be the start of routine rate increases every year or two. Surcharging is a one-time gain.
Another option is to limit “surcharging” to larger invoices only—say, $1,000 or more. That would impact a small percental of subscribers, and they usually understand that big-ticket items involve hefty fees if paid by card. But this requires manually adding the amount to the invoice prior to credit card payment.
Surcharging Compliance is Critical
Despite the cons noted above, many of our customers have implemented or plan to implement surcharging. If you move ahead with surcharging, there are several compliance elements to consider:
Is it legal in your state? Currently, credit card surcharging is illegal in some states and territories, currently including:
- Connecticut
- Maine
- Massachusetts
- New York (may not be enforcing but recently changed rules)
- Puerto Rico
Surcharge laws are based on the dealer’s location, not the cardholder’s.
- Surcharge amounts are limited to the lesser of a company’s actual merchant costs, or 3.0%. Surcharging at 3.5% or 4.0% can get you in trouble with the regulators. And if your actual merchant cost is 2.75%…you cannot legally charge more than that.
- Debit and prepaid cards may not be surcharged—if they are, significant fines can be levied. It is not always easy to know whether a card is a credit card or a debit card.
- Surcharge amounts must be clearly communicated before a purchase is made. So if you choose to surcharge recurring services, there needs to be a very comprehensive communication plan in advance to let the customer know they’ll be paying the surcharge beginning on a specified future date (if they continue to pay by card).
- You need to inform the credit card companies—Visa, Master Card, American Express, and Discover—at least 30 days before you begin assessing surcharges that you have opted to surcharge.
- You must pass both the original invoice amount and the surcharge amount on to the card processor. Likewise, the customer’s receipt must clearly identify both amounts.
Cornerstone’s Elegant Surcharging Solution
Due to the rising demand for a surcharging option, Cornerstone recently built an elegant and dealer-friendly solution. We needed to address surcharging in two very different instances:
- For “ad hoc” payments of either recurring or service/installation invoices made online, at www.Alarmpayments.com , and
- For scheduled recurring service payments, based on the recurring charge setup in our software.
For one-time, “ad hoc” payments, our recent rebuild of our Alarmpayments.com includes several enhancements that automatically keep our dealers compliant and their end subscribers fully informed.
- If a user enters a credit card, they are instantly notified of the surcharge amount, percentage and dollar amount, and given the opportunity to switch to ACH/bank debit to avoid a surcharge.
- If the user proceeds with the credit card, the site calculates and shows the surcharge amount as a separate line item, visible prior to checkout / submission of the payment.
- If a user submits a card number, Alarmpayments.com does a “bin” (bank identification number) check to determine if a card is either a debit or a prepaid card—if so, the card is not surcharged.
- Subscribers receive their receipt that clearly shows the original amount and the surcharge amount.
- Once submitted, the site writes back to the invoice detail records both amounts—original invoice and surcharge.
Our site therefore creates a seamless and compliant process for handling card payments both on the website, and importantly saving those invoice details to our software. Dealers can choose to surcharge these “ad-hoc” payment portal payments while NOT surcharging scheduled recurring payments. Dealers that choose to not surcharge can set a cap on card payments, so large amounts cannot be run.
When scheduled recurring invoices are run in Cornerstone’s software, the card surcharge is created and added “on the fly” as part of the process, and the autopay file likewise is created including the surcharge. Therefore, our dealers do not need to manually add, and attempt to maintain, line-item RMR surcharges for (say) 3% of the invoice amount.
The Pain of Manual Surcharge Management
This is a critical point. Without great recurring invoicing software seamlessly handling surcharging, a dealer is stuck having to manually add surcharges. Those items must then be managed forever. Otherwise, subscribers will endure billing errors, and you’ll get complaints. This means that dealers are forced to invest someone’s precious time in manually monitoring issues like these:
- Is the card on file a debit or prepaid card? If yes–requires laborious outreach to subscriber, who may not know.
- Has the billing cycle changed? If yes–requires a change in the surcharge amount.
- Has the underlying recurring charge amount changed? If yes–requires a recalculation of surcharge.
- Has a card been replaced/updated? If yes–requires a check for prepaid or debit card.
- Has the subscriber switched their autopay to ACH or printed copy? If yes, requires removal of the RMR surcharge.
- Has the customer changed from ACH or paper to a credit card autopay? If yes–requires adding the surcharge as a recurring line item.
- Has a credit or refund been issued? If yes–requires refunding the surcharge amount.
- Have you waived the surcharge for certain customers? If yes–requires forever tracking that exception.
To recover a relatively small fee, these issues can require a ton of valuable time!
Seamless is GOOD!
Instead—use Cornerstone. We’ve invested in a cutting-edge, seamless solution for handling both recurring invoice surcharges and one-time payment surcharges. Customers don’t need to manually enter surcharges, or perpetually manage them. As with so many elements of our software—we do the work for you, and you can simply enjoy the benefits of passing through these merchant fees.
Questions? Just give us a call at (224) 577-1197.
Cornerstone Billing Solutions is the leading provider of comprehensive billing services and powerful account management software for security alarm dealers nationwide. Call us at 224-577-1197 to learn how Cornerstone’s affordable and time-saving billing services, superior dealer support, and specialized, cloud-based software can help your business improve efficiency and profitability.