As the adage says, very few things in life truly come for free. Even something called “no-fee” credit card processing has a cost attached to it, but the promise alone still gets the attention of merchants. If you’re not sure what that cost is, read on to learn more about no-fee processing, the legalities of this practice, and whether you should use it or not.

What Is No-Fee Processing?

No-fee processing goes by many other names, such as zero-fee, zero-cost, or free processing. At the end of the day, though, these are all just different names for a business practice best known as surcharging. As you may recall, surcharges are extra fees that allow merchants to cover the cost of processing fees by passing them to their customers.

The only reason some companies advertise surcharging as no-fee processing is to entice inexperienced merchants. These companies will often sell “no-fee” processing packages that contain solely surcharging options.

How No-Fee Processing Works

Every credit card processing solution consists of online and physical terminals programmed to accept these payments. With no-fee processing, these terminals will be programmed to add a markup on all credit card purchases. The limit to the surcharge markup varies by state, and it usually hovers between 3% and 4%.

For instance, let’s say your customer uses a credit card to pay for a $100 coffee maker. Your terminal marks this as a credit card purchase, which automatically adds a 4% processing fee to the transaction. In this case, the fee is $4.

Visa And MasterCard Surcharging Rates

Effective April 15, 2023, Visa has implemented a reduction in the permissible merchant surcharge to the lower of (a) the merchant discount rate (MDR) for the applicable credit card or (b) 3%. The MDR is the fee charged to the merchant by the payment processor for credit card transactions. This is also called the cost of acceptance. This effectively caps the permissible merchant surcharge for Visa customers at 3%, down from the previous cap of 4%. For Mastercard customers, the surcharge cap remains 4%.

Should You Use No-Fee Processing?

If your state allows no-fee processing, there are plenty of benefits to using it. However, passing these costs to your customers creates some questions you need to consider. For instance, if your competitors aren’t surcharging, it’s hard to rationalize making customers pay up to 4% more at your business. If you try to make them do it, they’ll likely go elsewhere.

One possible exception to this rule involves the availability of your products and services. If what you sell can’t be easily obtained elsewhere, surcharging may work even in a market predisposed against it. That said, this still comes with a big risk of alienating customers.

Are you a business owner looking to learn more about surcharging? Give us a call and our account executives will provide you with the assistance you need and answer any questions you have.