A dentist recently called our office asking if it was legal for a dental office to surcharge credit card processing costs to patients. An example of surcharging is charging a patient $104 on a bill that’s $100 because they paid with a credit card.
Surcharging was illegal in Texas until 2018, but it’s now legal in all but two states: Massachusetts and Connecticut. Most credit card processors can offer a surcharging solution; and many aggressively promote them because they make the processors significantly higher profits than normal processing does. Processors often use the term “cash discount program” to describe their surcharge, claiming it will save their clients money.
Surcharging credit cards may be legal, but the question is whether doing so is a good idea. We’ll supply information that will help you decide.
You must follow Visa, Mastercard, Discover, and American Express regulations.
If you decide to surcharge patients for credit card payments, the surcharge must abide by Visa, Mastercard, Discover, and American Express regulations. Here are those requirements:
- If you surcharge ANY credit cards, you must surcharge ALL credit cards. Once you begin surcharging card use, you can’t choose to NOT surcharge.
- You can’t surcharge debit cards.
- You’re not allowed to surcharge cards for cardholders from states where surcharging is illegal (Massachusetts or Connecticut).
- You must register with all four card brands a minimum of 30 days in advance. If you don’t register, you’re not surcharging correctly.
- You must place notifications of surcharge at all payment stations and entrances to the business. If a fee is added to credit card transactions, it doesn’t matter if your processor calls it a “cash discount”—it’s a surcharge.
- You’re allowed to surcharge an amount equal to your average fees paid over the past quarter—up to 4%. To avoid recalculating these fees, many processors will set a steep flat rate of 4% on all cards.
Customers hate being surcharged.
Recent studies show between 65%i and 95%ii of customers who have been surcharged are less likely to patronize the business again. In dentistry, where customer loyalty is important to maintaining your patient base, these numbers should be a red flag. There’s a reason major stores haven’t decided to add a surcharge: it’s difficult for businesses to compete, and it’s only made more difficult if you’re angering customers.
It’s a huge increase in cost.
Most surcharge programs have a flat monthly fee ($40 is common). And then the patient is charged a 3–4% surcharge that the processor keeps.
The average dental office using TDA Perks Program-endorsed credit card processor Best Card has an effective rate of around 2.18%. (You can calculate your effective rate by adding all the rates & fees you pay your processor and dividing it by the total amount run in sales.) If your processor is charging 4% to your patients, it’s making an additional 1.82% profit at your patients’ expense.
All credit card processors have the same costs. Best Card makes a very small amount above the set cost all processors have. But a processor running cards at 4% would make a huge profit margin. Instead, you could raise your prices by 4% and keep the profit margin that would have been going to the processor.
Use Extra Caution with Virtual Credit Cards (VCC)
Virtual credit cards issued by insurance companies will not allow a surcharge. These are issued with an exact balance—try to charge a penny more, and they will be declined.
Since regulations require you to surcharge all credit cards if you surcharge any, you’d need to lower your fee so the payment—after the 4% surcharge is added—equals the VCC balance. That means you’d be paying the inflated surcharge rate out of your pocket!
In addition, the surcharge is reported to the card issuer; and you risk the insurance company noting the pre-surcharged amount (indicating you have a lower actual cost) and prompting an audit that could reduce the UCR (Usual, Customary, and Reasonable) reimbursement you receive for procedures.
All told, adding a surcharge for credit card payments may seem like a cost-saving measure, but can end up costing your business.