Credit Card Usage Is Increasing
Every year more contractors and homeowners are choosing to make their purchases using debit and credit cards. Furthermore, this trend is expected to gather momentum as your customer base gets younger and more payments are made online or over the phone. While B2B payments have historically been dominated by check, this dominance is rapidly shrinking, particularly as small businesses, such as general and subcontractors, make more use of card and electronic payments.
Processing Fees Add Up Quickly
Orders for construction supplies tend to be large. This means that the average transaction size is typically in the thousands of dollars. Furthermore, construction suppliers and distributors operate with tighter margins. Because card processing fees are measured as a percentage of revenue, these fees can meaningfully impact EBITDA and cash flow. For example, getting rid of a 2.5% average processing rate can increase EBITDA by ~15%. That's a significant increase in cash flow which can be reinvested in the business or used to drive a higher business value upon a sale.
Passing on Processing Fees Requires Card Brand Compliance
Implementing a convenience fee or surcharge program requires you to follow certain rules set by the major card brands (i.e. Visa, Amex, Mastercard, Discover). Failure to comply can result in legal action or being prohibited from accepting cards altogether. That's why it's important to learn the differences between the various ways you can pass on processing fees to your customers:
Ways to Pass on Processing Fees
- Convenience Fees: A convenience fee is a charge passed onto customers for using an alternative payment method. For example, a dealer that typically takes payments in-person can charge a convenience fee for payments made over the phone or online.
- Service Fee: A service fee is a type of convenience fee that is restricted to merchants typically operating in the education or government sectors.
- Surcharging: A surcharge fee is a charge passed onto customers for using a credit card. It's important to note this fee cannot be applied to debit card transactions and is prohibited in several states.
- Cash Discount: A cash-discount program is when a business offers a discount to customers who pay by cash, check or store-branded gift card. The business must list the price and the cash discount price for the items.
- Non-Cash Adjustment: Non-cash adjustment programs are a hybrid between a surcharge and cash discount program. Whereas in a cash discount environment a business lists the price and then the discounted price when paying by cash, the exact opposite is true in a non-cash adjustment environment. For example, the listed price would reflect the cost if paying by cash and then a price with the non-cash adjustment would be shown for alternative payment methods.
Do I Have to Notify the Card Companies When Passing on a Fee?
The answer to this depends on how you are passing on your processing fees. For example, if implementing a Surcharge, Service Fee or Non-Cash Adjustment program, a merchant must notify the card brands at least 30 days before implementation. Failure to do so can result in legal action or being prohibited from accepting cards altogether.
A Summary of Rules by Fee Model
Understanding the differences between the various ways to pass on processing fees can be very confusing. So confusing in fact that many people that work in the merchant services industry often forget the differences between the various models. To help navigate this complexity, we've put together an overview table that goes through the major considerations to think through.
Suppli is a Simple Way to Stay Compliant
Rather than go it alone, it's best to implement software that solves this headache for you. Suppli enables you to roll out a card convenience fee program instantly and automatically. Our software does the heavy lifting around calculating and charging the fees so you can simply enjoy an increased margin without any compliance worries.
Passing on Processing Fees Can Actually Get You Paid Faster
Incentives work, especially if they are economic. With Suppli, you can actually turn processing fees into a cash flow accelerator. That's because we uniquely allow suppliers to set rules for when processing fees are passed on to a customer. For example many construction suppliers offer their customers net terms, so it seems a bit unfair for a business to have to absorb a processing fee if a customer is paying late. To solve for this issue, with Suppli merchants can create a rule where the customer pays the processing fee if paying late but doesn't if paying on time. When this feature is enabled, we've seen invoices get paid much quicker as customers look to avoid this fee.
Suppli is a digital accounts receivable platform that enables construction material suppliers and vendors to turn their credit department into a competitive advantage. Top material vendors leverage Suppli to deliver the digital customer experience their customers demand and supercharge their credit teams with tools to get paid faster and reduce risk. Suppli is led by a veteran founding team of building materials suppliers, software engineers and financial experts.