Over the past six years, small and medium-sized businesses have increasingly adopted alternative pricing programs that allow them to share the cost of accepting card payments with their customers. You have probably experienced this as a consumer and while it can be frustrating when it isn’t communicated properly (e.g., when a business lists one price on the shelf and a different price at checkout) it has become a popular way for businesses to manage their costs.  

Originally, this was a major trend delivered through low-technology, standalone payment terminals. This is how our organization first launched these programs back in 2018. However, as the payments ecosystem continues to evolve, and compliance enforcement at merchant level grows, as does business owners’ desire to control costs, it has created a unique opportunity for vertical SaaS providers. 

This is the first of a two-part series about surcharging and other alternative pricing programs written with software developers in mind. When implemented correctly, we believe there is an opportunity to drive higher payment attach rates and margin back to SaaS provider. When done correctly, the risk of non-compliance can be minimized. 

Benefits for Small and Medium Businesses 

Profit margins vary by industry but many industries that are served by small business such as retail, automotive and consumer services have single digit margins1. Processing a credit card can cost a business 2-3.5% of the total transaction amount. When the business can offset this cost, the savings becomes bottom line dollars and can directly contribute to the business’ profitability or be invested for growth. A SaaS provider that delivers compliant tools to offset these costs creates a compelling financial benefit for their customers while building loyalty. 

Making Sense of Compliant Programs 

One of the challenges for software providers and their customers is that the payments ecosystem can seem complicated. Certain words and phrases carry special meaning and weight and when it comes to offsetting the cost of acceptance, there is a lot of confusion. As a full-service payment processor, we make it our mission to understand the nuances and provide compliant programs to our partners and customers. 

Surcharging 

  • Summary: This program increases the transaction amount when the consumer pays with a credit card. 
  • Explanation: The surcharge amount is added to the transaction total (e.g., a $100 transaction may be marked up to $103, enabling the merchant to offset their cost of accepting credit cards by $3). The surcharge amount is capped by Visa’s Rules at 3% or lower depending on state and local laws, and in some states, surcharging is explicitly prohibited. Debit cards are also explicitly prohibited from surcharging. In other words, if the consumer presents a debit card, the point of sale or terminal must NOT apply a surcharge. The business must also notify their acquirer of their intent to surcharge at least 30 days prior to applying a surcharge. This notification period allows acquirers the time needed to ensure they are populating the required transaction message fields to support card brand rules. Lastly, the merchant must also provide adequate disclosure to their consumers and delineate the surcharge as a separate line item on the receipt.  
  • Implication: Surcharging is a simple way for businesses to recoup some of the cost of processing card payments, but the compliance concerns are real. Businesses may be financially penalized for breaking card brand rules. Therefore, partnering with a payment processor that automatically excludes debit cards and properly caps the surcharge amount can protect your customers. 

Dual Pricing 

  • Summary: This program displays two prices at the point of sale, on the receipt and on the shelf. A lower price for cash payments and a higher price for debit and/or credit card payments. 
  • Explanation: Dual pricing requires a clearly communicated price differential by payment method. The example typically cited is the truck stop on the highway that advertises two fuel prices, a lower cash price, along with a higher card price. Unlike surcharging, there is no advance notice to the acquirer or waiting period required and the differential between the two prices does NOT need to be limited to 3% or be consistent from product to product. The key here is transparency. Clear signage on each product or service is required to stay compliant and to keep consumers happy (and not surprised at checkout). 
  • Implication: Maintaining two prices on all inventory items can be a challenge, but this can be solved by the right software solution. The most effective implementations we have seen start with the business management software that makes it possible for each item, modifier, etc. to have two prices listed.

Cash Discounting 

  • Summary: With cash discounting, the cost of payment acceptance is built into the merchant’s pricing, allowing a discount if the consumer pays with cash or check instead of with credit or debit. 
  • Explanation: The effect is the same as dual pricing, but it can be simpler to implement if the business is willing to raise all prices because it does not require two prices to be listed. This is critical: the listed price of the product/service must be the higher card price, and a discount is applied for cash payments. If done the other way around it becomes a surcharge and becomes subject to the rules listed above. 
  • Implication: Enabling automatic discounts for cash through software settings can be very important for keeping your customers compliant. If the business starts using custom fields to adjust prices (up or down), rather than utilizing a systemic solution, it can lead to non-compliance, putting them at risk. 

Service Fees & Convenience Fees 

These two programs exist for specific situations and are not covered in this series. 

Compliance is Crucial to a Sustainable Program 

The economic benefit to a SaaS platform is the subject of the next installment in this series. Before we get to that we should discuss why we are putting such a heavy emphasis on compliance. 

The payments ecosystem in the United States has grown out of the needs of the various participants; consumers want an easy way to pay, and merchants want a trusted way to accept payments. Financial institutions issue cards to consumers to facilitate easy-to-use payment methods, but they have an expectation that their cardholders will be treated fairly by merchants. Financial institutions also sponsor businesses or “merchants” into the ecosystem with the understanding that they will treat consumers fairly with the promise that they can expect to be paid quickly and reliably. The card associations (Visa, Mastercard, Discover, American Express, and others) set the rules for participating in this ecosystem. 

The rules focus on things like reducing fraud, ensuring interoperability through data compliance and ensuring cardholders and merchants meet the expectations of conduct and policy. In the case of surcharging and other related programs, the card brands are looking for merchants to deliver a fair and consistent experience for cardholders. 

Our Approach to Compliance 

Our first recommendation is always to refer to the card brands’ rules. Clearent has had a lot of experience with these “alternative pricing programs”. We have supported these programs for over seven years. We have over 15,000 active customers across these programs, and continue to onboard hundreds of new customers each month. Our goal is to make these programs available in a compliant way through technology and education. 

  • Product Compliance
    The first, and arguably easier step, is product compliance. This includes things like ensuring that receipts are formatted in a compliant way. Our payments gateway also requires features to ensure compliance. For example, to enable surcharging, the gateway must distinguish debit from credit cards in real time to avoid surcharging a debit card. Additional information must also be included in the transaction message, a feature we have available for customers on our surcharging program.  
  • Customer Education
    We do not expect a business owner to intuitively understand the requirements of each program. If they are not already participating in a program, it can feel like a lot of nuances. However, some knowledge is required to safeguard that business, which is why we have a program that educates on topics like signage (disclosure to consumers), policies, fee caps, etc. We want to make it easy for our customers to run compliant programs. 
  • Partner Education
    Above I mentioned that there are ways to ensure better compliance through the software the customer is using to run their business. In my past life I learned about a lean manufacturing principle called “poka-yoke”. Japanese for “mistake-proofing”, it is a method of designing tools and processes that, by their very nature, reduce mistakes. We help our partners poka-yoke their software and business process workflows to reduce the likelihood of non-compliance when running these programs. 

The next part of this series is all about what is in it for everyone if these programs are implemented. There is a tangible benefit for businesses that leverage alternative pricing programs, but there is also a benefit for SaaS providers that deliver this capability native to their solution. 

Disclaimer: The information provided in this communication does not, and is not intended to, constitute legal advice and is provided for informational purposes only. Recipients of this communication should contact their attorney to obtain advice with respect to any particular legal matter. 

Source: 

1 https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/margin.html 

Clearent by Xplor Profile Picture

by Matt Morrow

  • First published: May 01 2025

    Written by: Clearent by Xplor