There’s No Such Thing as Free Credit Card Processing

Merchants pay an average 2% to 3% in processing fees for every credit card transaction. Credit card processing fees consist of interchange fees paid to the customer’s card-issuing bank, assessment fees set by the credit associations (Visa, MasterCard, etc), and merchant services markups that go to the payment processors. Merchant service markups are the only part of credit card processing fees that are negotiable, yet they typically make up the smallest part of the total credit card processing fees merchants pay. 

As credit cards are becoming the most popular payment method in the US, many merchants have accepted the necessary evil of processing fees, which is also why many seek ways to find free credit card processing. By implementing cash discounting or credit surcharging (often called zero cost credit card processing), businesses try to get rates down to zero.

Unfortunately, because of the interchange fees charged by banks and assessment fees charged by credit card associations, there’s no such thing as truly free credit card processing. Even if you find a way out of the fees as a merchant, you’re likely passing the buck onto your customers. Let’s take a look at how “free” credit card processing works and when it makes sense for your business.

What Is Zero Cost Credit Card Processing?

Zero cost or zero-fee credit card processing typically refers to the process of passing some or all of the fees associated with payment processing along to your customers, so your business is essentially paying “no cost” to process payments.

Businesses can pass along these costs in three ways:

1. Cash discounting: This is when the merchant offers a discounted price for customers who pay in cash. You see this often at gas stations, which might charge a higher per-gallon price for credit card payments than cash purchases.
2. Convenience fee: This is when merchants add a fee at checkout for customers who want to purchase items with a credit card. The convenience fee is usually a fixed amount, regardless of the transaction amount and the products the customer purchases.
3. Credit surcharging: This is when the merchant passes the credit card payment processing fees onto the customer by adding them to the transaction cost. However, many merchant account providers and payment processors have policies against this. Merchants are expected to post signage in their physical or online store to let customers know of their surcharge policy. Most surcharge fees amount to less than 5% of the total transaction.

Although you might be able to pass the cost along to customers, you’ll still have to bear the cost of Payment Card Industry (PCI) compliance fees and other associated account costs. You’ll also need to consider the impact on the customer—and no one likes unexpected fees at checkout.

Is ‘No Cost’ Processing Right for Your Business?

When to Use Zero Fee Payment Processing

Generally speaking, we don’t recommend small businesses use “zero-fee” or “no-cost” payment processing strategies. However, you want to account for processing costs in your overall business pricing strategy. If these fees cut into your profits too much, research to find the cheapest credit card companies to lower those expenses. It’s also a good idea to always offer cash as a payment option for your shoppers.

Where Is Cash Discounting and Credit Surcharging Legal?

There aren’t any significant laws or regulations against cash discounting. In the US, cash discounting is legal in all 50 states. The Dodd-Frank Wall Street Reform and Consumer Protection Act was passed in July 2010, and one of its stipulations allows merchants to provide incentives for all-cash payments from customers.

However, credit surcharging is illegal or limited in these 10 states and Puerto Rico:

1. California: Retailers may only offer cash discounts.
2. Colorado: Retailers may only offer cash discounts.
3. Connecticut: No surcharges allowed. However, state law allows a minimum purchase amount for credit card purchases.
4. Florida: Surcharges are prohibited, but some types of “convenience fees” are allowed.
5. Kansas: No surcharges allowed.
6. Maine: No surcharges allowed.
7. Minnesota: Surcharges are permitted, but cash discounts are not. However, merchants can’t impose surcharges on store-issued credit cards.
8. New York: No surcharges allowed.
9. Oklahoma: No surcharges allowed.
10. Texas: No surcharges allowed.
11. Puerto Rico: Cash discounts are permitted, but surcharges are not.

Meanwhile, these five states have laws around convenience fees and cash discounting:

1. Georgia: Convenience fees are permissible if the merchant offers sufficient payment method options.
2. Nevada: Card issuers may not prohibit merchants from offering cash discounts.
3. Washington: Card issuers may not prohibit merchants from offering cash discounts.
4. Wisconsin: Card issuers may not prohibit merchants from offering cash discounts.
5. Wyoming: Cash discounts may not exceed 5%.

It’s also against the law to add surcharges for credit card purchases in the UK.

In Australia, businesses are allowed to charge payment surcharges as long as they aren’t excessive. It doesn’t have specific parameters around what qualifies as “excessive,” though it will investigate consumer complaints to determine if there’s a violation. As a reference point, it lists average surcharge fees at anywhere between 0.5% and 2% of the transaction value, depending on the payment type.

In China, businesses are legally allowed to add surcharges to cover processing costs imposed by banks.

While it may not technically be against the law where you do business, credit surcharging might violate the terms of service you’ve agreed to with your payment processing providers and related companies. Visa limits surcharges to no more than 4%, and American Express doesn’t ban them but strongly believes merchants shouldn’t use surcharges.

How to Implement Zero Cost Credit Card Processing in 3 Steps

If you decide “no cost” credit card processing is right for your business, here’s how to set it up:

1. Research the Fine Print

Before you do anything, ensure it’s legal within your local jurisdiction. Though the list above may serve as a good starting point for your research, it’s best to do your due diligence and check official government websites and references. Remember to ensure it’s legal both where you operate your business and where your customers are located.

If it’s illegal for you, you can consider alternative ways to set up low-cost online payments. Beyond legalities, it’s important to ensure you’re not going against any contractual agreements with payment processing companies and financial institutions you currently use in your business.

2. Choose a Provider

If your current payment processor or POS system doesn’t support zero-cost credit card processing, you’ll need to research alternatives. Some providers have programs that pass the charges along to your customers. Examples of credit card processors offering these kinds of programs include:

• PaymentCloud: Merchant services provider ideal for high-risk businesses. PaymentCloud doesn’t have standardized pricing, but you can expect reasonable rates and fees depending on your business type.
• AND processing: Flat-rate membership-pricing and zero-cost programs that reduce your processing fees. AND processing is great for high-volume merchants.
• Shift Processing: Month-to-month contract term zero-fee processing for high-risk merchants.
• National Processing: Merchant service provider for small and medium-sized businesses.

Because there aren’t plenty of options out there, many businesses get creative. You can use cash incentives and cash discounting with many “traditional” payment processors that are known for their affordable rates. Some of the cheapest credit card processing companies include:

• Square: Affordable cloud-based POS and credit card payment processor with business management features
• Payment Depot: Monthly subscription payment processor that offers discounted wholesale rates
• Fattmerchant: Subscription-based merchant services provider and payment processor
• Dharma Merchant Services: Merchant services provider with a virtual terminal for in-person payments
• Helcim: Affordable interchange-plus pricing for storefronts and businesses of all sizes with no monthly fee

3. Tell Your Customers

If you’re making any changes to store policies, it’s always important to communicate that to your customers. These are a few key touchpoints to consider:

• Website: Place a banner announcement at the top of your site (allow customers to close it so that it doesn’t interfere with their experience) and update your store policy page. You might also consider making a note next to pricing information on product pages and include it on your FAQs page.
• Email: Let your subscribers know what’s going on with your business and how it impacts them. Try to focus on the benefits they get (discounts) rather than the benefits to your business.
• In-store: When customers make an in-store purchase, train associates to inform them of the change and entice them to take advantage of cash discounts and incentives. Prepare them with canned responses to anticipated questions.

Bottom Line

Zero cost credit card processing sounds like a great idea and, in most cases, it’s exactly that—an idea. However, merchants can get creative with cash discounts, cash incentives, and even their pricing strategy to ensure profitability and a positive customer experience. If you still need to cut costs, switch to a cheaper credit card processing company.