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The Shortsightedness of Surcharging

Whether it’s a “convenience” fee, a baggage fee, a fuel surcharge, or a fee for using a credit card, no one likes surcharging. It’s a bait and switch. At a restaurant, a guest is making their buying decision based on menu prices. When the check comes, it’s higher than expected due to a 3-4% credit card surcharge, which is clearly itemized for the guest to see. But while the merchant is recouping that fee, tips are suffering, along with customer loyalty. The incidence of surcharging reached 31% at independent and small merchants in 2022, and surcharge fees increased from 1-2% in 2019 to 3-4% in 2022, according to Ipsos, a global market research specialist.


So why are credit card surcharges becoming more popular? First, it’s now legal in nearly all states to pass the fee onto the customer (except for debit cards). Another reason is the costs of credit card processing are rising and squeezing restaurants’ already slim margins. Along with rising labor costs and increased cost of goods (wholesale food costs are up 25% since Feb 2020), restaurants are hesitant to keep increasing prices. So, the merchant processor swoops in and convinces the merchant that a surcharge will solve their problem. They’ll even say “you won’t see a bill,” which is crazy-town. You still need to book the income and expense, and in what situation is it ever good to NOT LOOK AT A BILL? Perhaps the biggest reason surcharging has become so popular is that when the merchant processor convinces the merchant to pass on the fee, they have to flat rate it, and they make more money that way. Well, here’s why that’s not good for your bottom line as the restaurant owner.


You are in the business of hospitality. Your goal is to create a positive experience for your guests and to gain their loyalty. Marketing to existing customers is much cheaper than bringing in new customers. Don’t give your guests a reason to not come back! Remember, most people won’t say anything. They just won’t come back. Customers are much more willing to accept higher prices to due to inflation than they are having credit card fees passed on to them.


Ipsos conducted an independent analysis of changes in customer behavior at merchants where surcharges are applied compared to those where surcharges are not applied. In short, the merchant loses more in sales than they offset in customer surcharge fees. Merchants who surcharge see approximately a 10% reduction in debit and credit sales as customers change their purchase behavior to offset the fees:

  • 20% use cash to avoid surcharges

  • 17% stop shopping at merchants with surcharges

  • 14% reduce purchase amount to offset surcharges

It’s the credit card processors who are making out on this deal. Legally, the surcharge that merchants pass on to consumers cannot exceed the cost merchants are charged by credit card payment processors. Credit card processing fees for merchants equal approximately 1.3% to 3.5% of each credit card transaction. The exact amount depends on the payment network (e.g., Visa, Mastercard, Discover, or American Express), the type of credit card, and the merchant category code (MCC) of the business. So, for the merchant to pass on the fee, they need to flat rate the fee. In my experience, those variable fees work out to be 2.1-2.8% depending on volume. So, the processor rounds up to surcharge, which is legally capped at 4%, and THEY pocket the difference, not the merchant.


The other way to spin a surcharge is to offer a “cash discount.” So, now you’re increasing your menu pricing (that you were trying to avoid) and passing a much higher fee from your customer to the credit card company. To top it all off, they’ll sell you some software to handle the cash discount at $9.99/mo. Encouraging cash isn’t necessarily the smartest thing either—cash is risky and time consuming. We also know that customers spend up to twice as much when using a credit or debit card than they spend using cash. If the guest didn’t already change their behavior and reduce their spend, they’ll use their credit card and be annoyed they didn’t bring cash. Again, why bring the focus from your delicious food and delightful service to an annoying fee? And if you’re increasing your pricing anyway, why not put more of that money in your own pocket?


I am currently working on a project with a local pizza shop. The full results are yet to be realized, but the projections are promising. Through menu engineering, switching POS systems, negotiating better processing rates, and removing surcharging, we are projecting an additional $2,000+ per month in net profits. This is a conservative estimate, as I’m sure their customer loyalty will improve too. Stay tuned!




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