Free Credit Card Processing: Everything Small Businesses Need to Know

Free Credit Card Processing: Everything Small Businesses Need to Know

Credit cards have become an integral part of the lives of almost every American. Whether consumers are buying electronics at big box stores, shopping for specialty goods online, or paying for their lattes at their favorite coffee shop — they’re often doing it with a credit card.

According to Supermoney, credit cards have become the most preferred payment method for consumers in the United States. To illustrate America’s market size in 2019, 6 out of 10 Americans stashed a credit card in their wallet or purse.

It’s therefore not surprising to see that the US market is racking up record-breaking balances. For example, in 2019, American shoppers expanded their credit card debt by more than $92 billion. That number represents the largest credit card debt increase in one year since the Great Recession.

Credit Card Dilemma For Business Owners

No doubt, many business owners are glad, elated even, that the use of credit cards is at an all-time high.

With credit and debit cards, many customers no longer carry cash. This allows customers to be able to spend their money at stores and on e-commerce websites with ease. As a result, these large and small business owners will see higher sales (and often more profits).

However, the increased income comes with two major downsides for merchants. 

First, each business owner must open a merchant account that enables the store’s customers to use their credit cards where the business owner is charged card transaction fees for each completed sale.

Think of the card transaction fees as a customer loan from the card-issuing bank. In essence, the bank fronts each customer the funds to pay for their credit card purchase.

However, there’s no guarantee the customer will repay that debt. The issuing bank’s sole guaranteed income is the “interchange fee” charged during a credit card transaction.

From the merchant’s perspective, paying interchange fees takes money out of their pocket. As a result, merchants are always seeking ways to decrease the transaction fees they pay.

What is Free Credit Card Processing? 

The term “free credit card processing” refers to the process of shifting part (or all) of the credit card processing fees to customers who pay for their purchases with a credit card. This action is accomplished through a software application.

In a nutshell, your countertop terminal, point-of-sale system/POS system, virtual terminal, or payment gateway automatically recognizes that the customer’s credit card has been activated. So, the software quickly adds the extra charge to the item’s original purchase price.

Although most of the costs shift over to your customers’ end, you still have to pay monthly fees for a free credit card processing program. Other fees include PCI compliance fees and account fees. 

Within the payment processing industry, the terms “zero-fee processing,” “surcharging,” and “cash discounts” have all been used to describe this practice. However, the three terms aren’t the same, and one program’s legality varies depending on the state.

Surcharging vs Free Credit Card Processing

The terms “surcharging” and “free credit card processing” are similar in concept, but they differ in implementation. View this description of both practices.

Using the surcharging method, the displayed price for a product (say an elegant designer bedding set) reflects the item’s lower price if the customer buys it with cash, a debit card, or a check. However, if the customer buys the bedding set with a credit card, a surcharge is tacked onto the displayed price after the customer decides to use their credit card. The customer will see the higher price during the check-out process.

If you implement the program through a traditional merchant account provider or payment processor, you’ll each complete part of the set-up process. You must notify MasterCard, Visa, or American Express about your desire to place a surcharge on credit card purchases.

Surcharging can work for you no matter the credit card processor you currently use. 

In contrast, a free credit card processing provider will handle every set-up task for you. This includes notifying MasterCard, Visa, or American Express on your behalf and pre-programming your terminal with the surcharging software.

In both cases, however, you must notify your customers about the surcharging practice. You must also obtain and post the program signage in your store and/or on the e-commerce website.

Cash Discount Program 

A cash discount program is the other side of the surcharging coin. 

With surcharging, the customer sees a new price when trying to check-out. However, with a case discount program, the price on the item remains the same for customers who want to use a credit card. 

The discount surprise comes in for customers who choose to use their bank accounts, debit cards, or any other payment option (including contactless payment) at check-out. 

Many customers who use credit cards prefer the cash discount program over surcharging because they’ll not be met with any price increase when they want to checkout. 

Choosing the cash discount method still requires notices to customers and in-store and/or website signage. For reference, cash discount programs are completely legal in all 50 states and United States territories.

Three Important Caveats For Merchants

Three vital considerations apply to a surcharging or cash discount program. 

First, both practices only apply to a credit card purchase, while other forms of payment (including debit cards) are exempt from the charge. Although debit cards incur low processing rates, your business must pay these fees, as would be the case if you didn’t have a surcharging program in effect.

Next, the credit card surcharge (or cash discount) cannot be higher than 4 percent of the transaction value. If your merchant services provider charges a higher rate per transaction, you may have to pay the difference out of your pocket.

This scenario could also apply to purchases made with a rewards credit card, which typically has steeper interchange fees, hiking the overall rate above 4 percent. Higher-risk merchants, who often pay considerably higher-than-normal processing rates, may find themselves in the same boat.

Finally, remember that although surcharging will help to reduce your total credit card processing costs, you’ll still have other merchant account expenses. These costs include recurring and one-time fees plus a monthly surcharging program fee. 

So don’t fall victim to companies that equate surcharging with free credit card processing. They imply that you won’t have any out-of-pocket credit card processing expenses.

Convenience Fees Enter The Picture

A convenience fee is similar to a credit card surcharge. Merchants who engage in this program tack on a “convenience fee” to credit card purchases at checkout.

A convenience fee is always a predetermined amount instead of a percentage of the sales transaction. Whether the customer charges a bottle of water or a diamond necklace, they’ll pay an identical convenience fee.

Setting the proper convenience fee is a balancing act. While you want to charge enough to cover transaction processing costs, an excessively high fee will likely cause you to lose sales. 

Also, maximum convenience fee limits vary between jurisdictions, and every major credit card brand has its regulations. Ask your merchant services provider to help you resolve this issue.

Zero-fee Processing: The Legal Issues

As of September 2020, some type of zero-fee processing is legal in all except four states and one territory in the United States. If your business is located in one of these places or has a branch there, you cannot charge your customers more for using their credit cards.

These jurisdictions include Colorado, Connecticut, Kansas, Massachusetts, and Puerto Rico. Also, note that implementation requirements likely vary in states that permit the practice. And, remember that you can legally offer a cash discount program in these “off-limits” jurisdictions.

Because of recent legal developments, surcharging is expected to soon become legal in every state. However, implementation rules will likely continue to vary throughout the states and territories.

Note: Businesses that sell to different states need to be careful with the different laws governing each state (or the state address of the cardholder). The process can easily get complicated. 

How to Choose A Free Credit Card Processing Program

If you’ve decided to jump on the free credit card processing bandwagon, consider several factors when searching for the best program. 

First, remember that any merchant services provider can help you (including your current one, if applicable). If you have a good business relationship with the company, you should be able to complete the free credit card processing setup work with little or no inconveniences.

Regardless of the free credit card processing program you select, your business must comply with certain operating guidelines. Besides, you’ll need to make decisions about how and when to implement the program. Your card processor should be willing to provide guidance every step of the way. 

Here are six important considerations that should be on your radar.

Your Competitive Landscape

Before leaping into the fray, give your industry’s competitive landscape some thought. Ask yourself if customers can easily purchase your products from another store.

If the answer is “yes,” you may want to put the free credit card processing program on hold. You’ll have a tough time keeping customers if they’re forced to pay more for the same products at your business. And, there’s always the chance your competitors could create a negative ad campaign around your program.

For comparison, realize that major brick-and-mortar retailers such as Walmart and Target don’t participate in a free credit card processing program. If your business sells niche products, however, you may be able to implement the credit card program without losing many sales.

As a guideline, look at your competitors’ actions. If several of them are accepting credit card payments, you’ll probably be able to do the same thing without any repercussions. If all of your direct competitors are on the sidelines, you probably don’t want to be the first one to step up.

Concerns About Alienating Customers

In the worst-case scenario, numerous customers will abandon their purchases when they learn that it will be more expensive to use their credit cards. Whether you own a brick-and-mortar store or sell to customers through an e-Commerce website, you could face the same problem.

However, you have an advantage if your store offers superior customer service and/or other advantages over your competitors. If that’s the case, you may be able to minimize the negative fallout from the free credit card processing issue.

Your Remaining Merchant Account Fees

As previously mentioned, a free credit card processing program only applies to transactions made with a credit card. Therefore, you’re still on the hook for the remainder of your merchant account fees, plus the monthly maintenance fee for the free credit card processing program.   

Before signing on the dotted line, analyze your projected costs, and confirm that you won’t lose money by implementing the program. Note that this practice is best suited to businesses with steady, high-volume credit card transactions each month. If your business doesn’t fit that bill, you may want to skip this program.

Customer Notice And Signage Requirements

You must provide your customers with “adequate notice” that using their credit cards will cost them more than other payment methods. Also, you must post visible signage in your store and/or on your website to that effect. Note that it would cost more if you decide to use professional store signages.

Processing Equipment Charges

If you don’t currently have credit card processing equipment in place, some free credit card processing providers may offer to lease a terminal to your business. Avoid this arrangement at all costs, as you’ll eventually pay much more over time than if you choose to simply buy the terminal.


Security is a big issue when it comes to online payments and transactions. And it’s an issue that affects everyone, whether large or small businesses. 

To make credit card processing more secure for you, there are 2 major things you can do. 

First, you’ll need need to adhere to the Payment Card Industry Data Security Standard (PCI DSS) that was created in 2006 by leading payment companies Discover, American Express, JCB, Mastercard, and Visa. This standard serves as a benchmark to ensure secure online transactions. 

Secondly, you’ll need a card reader that accepts Europay, Mastercard, and Visa (EMV) chip cards. These kinds of chips are harder to duplicate, so you run a lower risk of being defrauded or scammed. 

How Non-profits Can Benefit From The Program

Many businesses may face customer resistance from a free credit card processing program. However, non-profit organizations may benefit from their donors’ higher credit card fees.

For perspective, budget-conscious non-profits also have to pay credit card processing fees, although some providers offer discounted rates to these groups. Donors may be less likely to gripe about increased credit card processing fees if a larger portion of their donation reaches the charity’s coffers.

The bottom line

Before committing to a free credit card processing program, determine if the program will produce a net gain in your cash flow. Yes, you’ll save money on credit card processing expenses, but you may lose some customers (and alienate others) in the process.

If you decide to move forward, consider asking your existing merchant account provider to handle this add-on service. By doing that, you’ll avoid sales pitches from free credit card processing companies who may not have your business’ best interests at heart.

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At Payment Depot, we can help you implement a surcharging or cash discount program depending on your needs. Contact us today to discuss your business and we can help you figure out your next steps.

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