Surcharge the right way with real-time BIN lookup

Surcharging can encourage merchants to accept credit cards in verticals where credit card adoption is low. But it also comes with unique compliance requirements, and might increase checkout friction and cart abandonment. This post will discuss the definition of surcharging, when to consider enabling surcharging, and how to surcharge compliantly with real-time BIN lookup.

What is (and isn’t) surcharging?

Surcharging passes the cost of credit card acceptance on to the end customer. 

A surcharge is a volume-based (i.e. percentage-based) fee added to a card payment. The name of the fee doesn’t matter. If a “convenience fee” is a volume-based fee added to a card payment, that fee is still a surcharge.

Should you enable surcharging?

When evaluating whether or not to enable surcharging for your merchants, there are two factors to consider:

1. What problem are you aiming to solve?
2. What are the expectations in your vertical?

The answers to these questions will guide your decision.

Will surcharging solve the real problem?

Software companies often look to surcharging to reduce price pressure from merchants. In reality, surcharging rarely solves the underlying cause of merchant price sensitivity and often has unintended consequences.

Merchant price sensitivity is often rooted in product gaps, misaligned positioning, or payments just not being as embedded as it needs to be to create real value. Passing the cost of payment processing on to the end customer doesn’t solve these problems.

But passing the cost of payment processing to the end customer can drive customers to choose a less profitable payment method like ACH, take their payment off-platform, or abandon the transaction altogether – none of which help the platform drive payments revenue.

What are the expectations in your vertical?

Most verticals fall into one of 3 categories.

1. Card adoption is high and customers expect to use cards. Low-ticket B2C retail is the archetype here. Customers would be shocked if they got to the department store checkout and encountered a credit card surcharge. In these industries, surcharging generally doesn’t make sense.
2. Card adoption is low. High-ticket, B2B, and other emerging markets might have very low card adoption. In these verticals, surcharging can help merchants get comfortable with card acceptance. Customers are more likely to willingly pay surcharges in these verticals because it feels like a new benefit.
3. In the non-profit sector, it might make sense to offer the choice. You can give donors the option to cover payment processing costs, and many will choose to cover the cost because they view it as part of their gift.

In general, if card adoption and utilization are already high, surcharging can add friction and might reduce card utilization. However, in verticals where card payments aren’t the norm, surcharging can encourage merchants to accept card payments.

Requirements for compliant surcharging

If you decide to enable surcharging for your merchants, it’s important to implement in a way that complies with card brand rules. We’ll focus on compliance with Visa rules because they’re the largest card network in the U.S. Other major card networks have similar rules and requirements.

The card networks use audits, secret shoppers, and customer reports to make sure merchants are following the rules. Merchants found to be surcharging in a way that is not compliant with card brand rules can be fined or even removed from the card network.

For vertical software platforms, the three most important requirements for compliant surcharging are:

1. Prevent surcharging on debit card transactions
2. Limit surcharge amount to merchant’s actual processing cost or 3% (whichever is less)
3. Block surcharging based on merchant location

Prevent surcharging on debit card transactions

Visa’s rules prohibit surcharging debit cards, so software platforms need a way to determine if a card is debit or credit.

The first six or eight digits of a card number are the Bank Identification Number (BIN). This identifies the issuing bank and the type of card.

With real-time BIN lookup, software platforms can programmatically determine if a card is debit or credit and determine if the transaction is eligible for surcharging.

Limit surcharge amount to merchant’s actual processing cost or 3% (whichever is less)

Visa’s rules also limit the amount of the surcharge to the merchant’s actual processing cost or 3% of the transaction amount, whichever is less.

Software platforms can comply with this requirement by using a simple blended price (e.g. 2.9% + $0.30 or 3.0% + $0.50) with a volume fee below 3%, and automatically calculating the surcharge based on the blended fee.

Block surcharging by merchant location

Some states impose limitations on surcharging or prohibit it altogether. 

Visa rules require that platforms have the ability to block surcharging based on the merchant’s location, so that platforms can comply with state laws.

Actual compliance with state laws is the platform’s responsibility. For platforms with significant volume in states that regulate surcharging, it makes sense to engage an attorney specializing in this type of compliance. 

Real-time BIN lookup at Rainforest

The ideal BIN lookup solution is fully embedded in the checkout component. This is critical for two reasons:

1. The BIN lookup can’t start until the customer inputs the card number. And you want the results of the BIN lookup as quickly as possible. If a third-party tool adds any delay, redirect, or other unexpected behavior on the checkout screen, customers are more likely to abandon the transaction.
2. With a third-party BIN lookup tool, you need to send the first 6-8 digits of the card number to the third-party. This means you have to handle the card number to extract the first 6-8 digits, which might bring the platform or merchant into PCI scope in an unexpected way.

The ideal BIN lookup solution is fully embedded in the checkout component to deliver a secure, frictionless experience.

Rainforest’s real-time BIN lookup solution was built for this exact purpose. 

It’s fully embedded into the payment component to support compliant surcharging while keeping the platform out of PCI scope and maintaining a clean, frictionless checkout experience. Learn more about surcharging with BIN lookup