Credit card surcharges and why you don’t need to charge them

What is a credit card surcharge?

How many times have you gone up to buy something online, and at the final stage of the process there’s a small note in fine print:

“Please note, if you are paying by credit card there will be a 2% surcharge.”

You may have a similar notice on your website or next to the cash register in your own business? Why do businesses need to add a credit card surcharge?

What is a ‘Merchant Service Fee’?

Credit card companies charge retailers a ‘Merchant Service Fee’ (MSF) as part of the cost of doing business. A MSF is a percentage of each transaction that takes place, basically charging the business for making sure your customer’s payment finds its way into your bank account. In addition to the interest rates they charge borrowers, MSFs are part of how credit card companies make money.

How much do Merchant Service Fees cost?

While in Australia and the UK, the MSF is typically less than one percent for each credit card or contactless debit card transaction, in New Zealand the cost for accepting card payments can be anywhere between 1 and 4 percent, with an average of about 1.6 percent.

These MSFs apply to all credit card transactions, whether someone is paying at your counter, or ordering through your website. At least half of adult New Zealanders are regularly shopping online, an increase of 13% from 2019, and these numbers will continue to grow.

The 2020 New Zealand eCommerce Review calculates $4.7 billion dollars was processed in online transactions across 2019. If we make the false assumption that all of those online payments were made using credit cards, and the retailers were charged a 1.6 percent MSF, that’s over $75 million dollars going to credit card companies instead of kiwi businesses!

Now we know that customers are using other online payment methods as well as credit cards, but that’s still a staggering amount of money effectively leaving New Zealand’s economy.

Why retailers add a credit card surcharge

When the MSF takes such a large percentage of each sale, it’s natural for business owners to look for ways to recoup some of those losses.

When you know you’re losing around 1.6 percent of each transaction, some retailers will add on 2 percent of the total of each transaction. The credit card companies still take their share and local businesses aren’t running at as much of a loss.

Sadly, the loser in all of this is the New Zealand consumer who ends up paying more through no fault of their own.

For example, on a $1000 sale, the merchant may charge their customer $1020 to pay with their credit card, so that approximately $17, or 1.6 percent can go to the credit card company.

Which retailers add a credit card surcharge?

The truth is, any business can add a credit card surcharge onto transactions. From hotels to hairdressers, it’s common to be asked whether you’re paying by credit or debit so the merchant processing the payment knows whether to add the extra cost on.

In 2009, the Commerce Commission said a ‘no surcharge rule’ on credit card payments was anti-competitive. Since then, businesses have been adding surcharges to provide more transparency on the fees being charged by credit card companies.

How can you avoid passing on costs to your customers?

In addition to the growing trend of more New Zealanders shopping online, we are also seeing Kiwis shunning their credit card in favour of other payment options.

At the end of June 2020, total credit card debt in New Zealand was down 14%, plus credit card billings were 9 percent lower compared to June 2019.

New Zealanders are quickly realising that when you’re charged an extra two percent to spend their own money, that online deal looks much less appealing.

Some websites offer multiple payment options to give consumers a choice. What the data is showing us is that when faced with a two percent surcharge to use their credit card, Kiwi’s are looking for an online payment alternative.

Online payment systems

Instead of borrowing against your future income, which is essentially what you’re doing by using your credit card, more Kiwis are using online payment systems like POLi that allow you to pay directly from your bank account.

Benefits of an online payment systems

One of the major benefits of using an online payment system to process transactions instead of a credit card are lower MSFs.

Systems like POLi, PayPal, Account2Account and Bambora generally work out cheaper than paying direct via credit card. For more on how much online payment systems cost in New Zealand, read more here.

Another reason to use an online payment system is security. Customers want to know their financial details are secure when transferring money. Direct bank transfer systems like POLi invest heavily in cyber security, so you can make instant payments online without needing to log in to their banking website. This makes processing payments simple, so you don’t see a drop off in your cart conversion rates.

Fewer Kiwis own credit cards

The 2020 eCommerce Report that saw a 13% growth in online spending also found 30 to 40 year olds are shopping online more often and spending more on average. A 2019 survey of 1600 participants by Laybuy found this same demographic are ditching their credit cards in favour of payment alternatives.

Of those surveyed in the 30 to 40 year age bracket, 49 percent had never owned a credit card. Of everyone surveyed, 45 percent said they didn’t have a credit card, with those who had previously owned one citing worries about accumulating debt and the interest they were being charged the reasons for giving credit cards up.

How much does POLi cost?

Credit card companies can charge anywhere between 1 to four percent of each transaction, plus monthly service fees ranging from $25 – $60. In contrast POLi charges a 1 percent MSF which is capped at $3 per transaction, and only charges a $10 monthly service fee if the total sum of your transaction fees is less than $10.

Going back to the example of an online purchase of $1000, the credit card fees on that transaction could be around $17, while POLi would only charge you $3.

Capping POLi MSFs at three dollars per transaction means ballooning fees don’t eat into your profit margins. Lower fees are more easily budgeted for and absorbed, so you don’t need to add a credit card surcharge for each transaction.

Your business wins, your customers win, and ultimately the New Zealand economy wins as less money heads overseas into the pockets of credit card companies.

Increase sales with POLi

It’s likely there will always be people who will prefer to pay with their credit card. But, if you’re tired of apologising or explaining to your customers about the need to add a credit card surcharge, it’s time to offer them an alternative.

Right now, POLi is offering all new website owners our lowest-ever fee at just $0.50 per transaction max.*

Find out more about this great deal now

* Special pricing excludes GST and applies until 31 October 2020. See our standard prices here