Surcharges, margins, and interchange fees: Choosing a payment service provider

As of October 6, 2022, business owners in Canada have been able to pass on their credit card processing fees to customers. This covers the cost of the transaction to the card brand networks and banks and, prior to then, was typically incurred by merchants. However, it can now legally be charged to the customer as a ‘surcharge’ and is capped at 2.4 percent of the purchase price.

This change was brought about after Visa, Mastercard, and some banks were served multi-million dollar class action lawsuits claiming that the processing fees they were charging Canadian business owners were restrictive and too expensive. These companies therefore agreed to start allowing merchants to pass on these fees to their customers.

Applying surcharges to purchases has been legal in the majority of US states for the best part of a decade, with the exceptions of Connecticut and Massachusetts, and are capped at around 4 percent. This is not the only way this fee can be passed on to customers – businesses can also increase the prices of their products or apply a self-defined convenience fee. Different rules and regulations apply to surcharges and convenience fees which can vary depending on the jurisdiction.

Source: Helcim

However, the total payment processing fee charged by payment providers is not just the ‘wholesale’ interchange fee, which varies depending on the type of transaction and card, and other factors. There are various pricing models a payment provider can charge businesses, including a flat rate fee or ‘Interchange Plus’ fee – both of which cover the interchange fee and the payment provider’s margin.

Flat rate fees do not change even with a fluctuating interchange fee because the provider applies a flat rate fee no matter the cost of the interchange rate. Interchange Plus is when the provider applies a fixed margin on top of the interchange fee, so it varies depending on the latter. This means that any savings incurred by a low interchange rate gets passed on to the business, rather than being absorbed by the provider as in the case of flat rate pricing.

The pricing model – be it flat rate, Interchange Plus, or other – is chosen by the merchant service provider. This should be considered by the business owner when deciding on a provider to work with, and they should pay particular attention to the types of transactions they process to get a sense of how much they could be saving with one pricing model or another.

Source: Helcim

Another important factor is deciding how to cover this cost – do you pass the whole processing fee to the customer, or cover part or all of it yourself?

In September 2022, nearly 4,000 Canadian businesses were surveyed on how they planned to deal with credit card processing fees after the change was enacted. While 28 percent said they would increase product prices to cover the cost, almost a fifth said they would be passing on the fee to the customer. A further 15 percent said they did not plan to surcharge and would continue absorbing that cost.

The best option for your business is likely tied to how you intend to remain competitive. If providing customers with the option of paying in a variety of methods makes the business uniquely convenient, then you may be more inclined to cover the fee. However, if your competitors are willing to pay it on the customers’ behalf, then you may want to do the same.

In either scenario, having the lowest possible processing fee is paramount. While it is crucial for you to get the lowest rate, most payment companies do not provide a clear breakdown of their fees, nor are they transparent about the components that constitute the final charge and the exact margin applied. Be sure to ask your payment provider about their pricing model beforehand. The good thing about Interchange Plus providers is that the industry standard interchange rate is passed directly onto you with a small set margin applied on top.

Businesses are also prone to pitfalls surrounding the regulations when it comes to passing on the surcharge or overall processing fee to the customer. These consist of anti-competitive laws, rules specific to the card brand, surcharge caps that vary by jurisdiction, and more. Trying to abide by them all is challenging, but failing to do so can lead to legal and financial repercussions. It is, therefore, crucial to communicate with your provider about your intent to surcharge so they can help you navigate all the regulations, making them as simple as possible for your business.

One payment company that has prioritized this is Helcim. When sending an invoice or when a customer pays online via HelcimPay, business owners have the option to enable ‘Helcim Fee Saver.’ When this is switched on, the credit card processing fee – which is based on the Interchange Plus pricing model – is automatically passed on to the customer. If your customer chooses to pay by ACH bank transfer, you will pay for the processing fee, so the customer benefits from no additional costs. Fortunately, the ACH processing fee is only 0.5 percent + 25¢ and capped at $6 – much lower than the credit card processing fee. This simple feature saves your business the hassle of navigating complex rules on surcharging, by automatically applying the correct processing fee for the card brand used.

Helcim’s pricing model is widely regarded as one of the most transparent and affordable. For in-person payments, the provider only applies a margin of 0.4 percent + 8¢ on top of the interchange and card-brand fees. For online and manually-keyed payments, it’s 0.5 percent + 25¢. The average processing fee for an in-person payment therefore turns out to be 1.94% percent + 8¢ and for online or manually-keyed payments it’s 2.51 percent + 25¢. Merchants save an average of 25 percent when they switch to Helcim.

To find out more about how Helcim can help you save money on every sale, and give all parties in any transaction full transparency (and options), contact the sales team today.