Why Surcharges Might Be Cutting Into Small Business Profits 🌪️

For small business owners, every dollar counts. Between rising supplier costs and unexpected expenses, maintaining a healthy profit margin is a constant struggle. However, there’s one cost that often goes unnoticed but quietly chips away at profits — the small business surcharge on digital payments. These extra fees, especially for contactless payments like tap-and-go, can have a significant impact on small businesses, leaving many owners feeling the strain without fully understanding the cause.

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Take a local café owner in Sydney, for example.  They spent years building a loyal customer base. Offering convenient payment options like credit and debit cards, as well as tap-and-go, has been essential in keeping customers happy. But recently, they noticed that their margins were getting tighter. 

While customers enjoy the ease of tap-and-go, they started to realise that convenience comes at a cost. The fees on contactless payments are up to three times higher than those for standard card payments. This creates a hidden expense for small businesses that can quickly erode their profits, especially on small-ticket items.

What Is a Small Business Surcharge for Contactless Payments?

A small business surcharge for contactless payments is an additional fee that businesses may apply to cover the costs associated with accepting payments made via tap-and-go cards or digital wallets. With the rise of contactless payments, many small businesses find themselves facing higher transaction fees from banks and payment processors. The surcharge helps offset these costs.

For example, when a customer taps their credit or debit card to pay, the payment provider typically charges a fee. This can be higher than traditional card payments, as contactless transactions involve quicker processing and sometimes extra security features. To recover these fees, a small business surcharge may be added, typically around 1-1.5% of the total bill.

This surcharge is usually clearly communicated to customers, either at the point of sale, on menus, or through signage. Businesses may apply it only to contactless payments, as these tend to incur higher processing costs compared to other payment methods like cash or EFTPOS.

The idea behind the small business surcharge is simple: it helps businesses manage the rising cost of digital payments. Without it, these businesses could face squeezed margins, especially if contactless payments make up a significant portion of their sales.

The Real Cost of Small Business Surcharge for Contactless Payments

Many consumers are happy to pay a little extra for the convenience of tap-and-go payments. However, these fees are not only a problem for small business owners; they also have a direct impact on consumers. As the costs pile up for businesses, they often have no choice but to pass these expenses on to customers.

This meant raising prices to cover the extra costs of payment surcharges. It wasn’t an easy decision, and some regulars were caught off guard by the price increase. While some understood, others felt frustrated. 

Small businesses didn’t want to lose loyal customers, but with rising costs and slimmer margins, they couldn’t absorb the fees any longer. This is a reality that many small business owners face — when surcharges go up, prices often follow. Unfortunately, consumers usually bear the brunt of these hikes without realising that the extra $1 or $2 they’re paying is directly tied to payment provider fees.

The cumulative effect of these hidden costs may seem small, but over time they add up, affecting both the business and the consumer experience. As prices increase across the board, consumers start to feel like they are paying more for the same products. In an era of rising living costs, this only adds to the frustration and can harm customer loyalty.

Should Small Businesses Charge a Surcharge or Just Raise Prices?

Deciding whether to charge a surcharge on contactless payments or raise prices is a key decision for small businesses. Both strategies aim to cover rising operational costs, but each approach has its own impact on customers and business operations.

A surcharge on contactless payments targets the specific costs of digital transactions, like credit card or tap-and-go fees. It helps businesses recover those costs without increasing the base price of products. This method keeps pricing transparent and allows businesses to pass on fees directly to those using specific payment methods. However, some customers may feel frustrated by extra charges. If not clearly communicated, a surcharge could lead to complaints or even lost business, especially if competitors don’t apply similar fees.

Raising prices across the board is another option. This method spreads the additional cost evenly across all customers, regardless of payment method. It’s a straightforward approach. However, higher prices could alienate price-sensitive customers. If they notice a price increase, they may feel the business is not providing enough value. In a competitive market, raising prices could drive customers to seek better deals elsewhere.

Ultimately, the decision depends on your customer base and payment methods. If most transactions are contactless, a surcharge might be the most efficient way to recover costs. However, if you have a diverse mix of payments, raising prices might be simpler and less controversial. Either way, businesses must consider customer expectations and the competitive landscape before making a choice.

The Way Forward for Credit Card and Online Payments

So, how can owners tackle the growing problem of the small business surcharge?

First, businesses should explore the option of least-cost routing, a system that allows payments to be routed through the cheapest available payment method. This could significantly reduce transaction fees, but it’s important to note that fewer than half of Australian bank terminals currently support this feature. However, if your bank offers it, it’s worth investigating and pushing for this option to be activated.

Second, small businesses should reassess their pricing strategies. While increasing prices to cover payment surcharges may seem like the obvious solution, it’s not always the best approach. Instead, businesses can explore bundling products or offering discounts for cash payments, which tend to have lower fees. These strategies can help keep customers happy while ensuring the business doesn’t lose money with every tap-and-go transaction.

Lastly, increase transparency with customers. Many consumers are unaware of the reasons behind price increases, so it’s important to clearly communicate why certain products may cost a little more. Simple signage or explanations at the point of sale can go a long way in building understanding and trust with customers. Most people will appreciate the honesty, especially when they know the extra costs are tied to maintaining the business’s operations.

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Turning the Tables on Small Business Surcharge

Digital payment surcharges may seem like a small issue, but for small business owners, they are a significant drain on profits. These fees not only impact the business but also drive up costs for consumers. 

However, by taking steps such as exploring least-cost routing, reassessing pricing strategies, and maintaining transparency with customers, small businesses can reduce the impact of these hidden fees. The key is to recognise the problem, take action, and find solutions that allow businesses to thrive.

We know how tough it can be to juggle rising costs and keep your customers happy. Digital payment surcharges might feel like just one more thing to deal with, but you don’t have to navigate it alone. If this feels overwhelming or you’re not sure where to begin, we’re here to help. Reach out — together, we can tackle this and set your business up for success.

For a comprehensive view of ensuring the continuous growth of your business, download a complimentary brochure on How To Drive Pricing Strategy To Accelerate Sales & EBIT Growth.

Are you a small or medium-sized business in need of help aligning your pricing strategy, people and operations to deliver an immediate impact on profit?

If so, please call (+61) 2 8607 7001.

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