By Naomi Fisher June 3, 2025
Merchant service models are at the core of how businesses manage customer payments. Two prominent approaches are the traditional model, where merchants absorb all transaction fees, and the surcharge-based model, which shifts some of the financial burden to the customer. As more businesses seek cost-saving measures, understanding the strengths and limitations of each model becomes essential.
Understanding the Traditional Merchant Service Model
In the traditional merchant service setup, businesses accept credit and debit card payments and absorb all associated processing fees. These fees typically include interchange charges from card networks and service fees from payment processors.
The traditional model has long been the industry standard. Customers pay only the price listed, with no added fees for their chosen payment method. For the business, these fees become part of the cost of doing business and are often factored into overall pricing strategies.
This model fosters a seamless, customer-friendly payment experience. It removes any barriers to purchase and helps maintain goodwill. However, it can be expensive for merchants, especially those with high transaction volumes or low profit margins.
Introduction to the Surcharge-Based Model
The surcharge-based model is gaining popularity as businesses look to reduce expenses. Instead of absorbing transaction fees, merchants add a surcharge—usually between 2 and 4 percent—to credit card purchases. This surcharge is meant to offset the cost of processing payments.
Debit cards are typically excluded from surcharges due to legal and card network restrictions. The customer is informed at the point of sale and sees the surcharge as a separate line item on their receipt.
This approach can lead to significant savings for businesses, particularly in sectors with high credit card usage. However, it can also influence customer behavior and raise compliance concerns.
Cost Implications for Businesses
One of the main reasons businesses consider switching to a surcharge-based model is cost reduction. Traditional models can lead to thousands of dollars annually in processing fees. Surcharging shifts those fees to customers, freeing up cash flow.
For businesses operating on slim margins or managing tight budgets, the savings can be a lifeline. These extra funds can be redirected to inventory, staffing, marketing, or growth initiatives.
That said, businesses must weigh these savings against potential loss of customers who may dislike the added fees. In some markets, customers may accept surcharges without complaint, while in others, they may choose competitors who do not pass along fees.
Customer Experience and Perception
From the customer’s perspective, the traditional model is more favorable. It offers a smooth and predictable payment experience. Customers are less likely to feel surprised or annoyed at the point of sale, leading to a higher likelihood of repeat visits.
In contrast, the surcharge-based model introduces an extra step in the transaction. Customers must agree to pay an additional fee, which can create friction. Businesses must clearly communicate this charge and provide visible signage, both in-store and online.
Some customers may view surcharging as a nickel-and-dime tactic. However, if positioned correctly and paired with value-added service, many customers may understand and accept the fee.
Legal and Compliance Requirements
Compliance is a key consideration with surcharge-based models. In the United States, merchants must adhere to state laws and card network rules. Some states have historically restricted or banned surcharging, although legal challenges have led to changes in enforcement.
Card networks like Visa and Mastercard have specific rules. Merchants must register their intent to surcharge and display disclosures prominently. The surcharge amount cannot exceed the actual processing cost.
Traditional models do not require this level of regulatory navigation. Merchants can accept payments without additional legal considerations beyond PCI compliance and standard contractual obligations.
Setup and Implementation Differences
Implementing a surcharge model requires changes to point-of-sale systems, employee training, and customer communication. Businesses must update software to calculate surcharges, format receipts accordingly, and ensure the right card types are charged.
Employees must be trained to explain the policy clearly and professionally. Poor communication at checkout can damage trust and reputation.
Traditional setups are easier to maintain. Once a payment processor is chosen and integrated, businesses simply process transactions and pay the associated fees. There is no need for ongoing disclosures or additional registration.
Industry Suitability and Use Cases
The best model may depend on the type of business. High-ticket service providers like legal firms or dental practices often adopt surcharge-based systems with little customer pushback. Their clients are used to processing fees and may prioritize expertise over cost.
Retail and hospitality businesses, however, operate in more competitive and price-sensitive environments. A surcharge could discourage impulse purchases or result in negative reviews.
Subscription-based services and e-commerce sites may also find it harder to justify surcharges unless clearly communicated. The traditional model often works better when repeat business and smooth experiences are essential.
Impact on Branding and Loyalty
The payment experience contributes to overall brand perception. In the traditional model, customers associate the brand with simplicity and transparency. It aligns well with premium positioning and customer-centric values.
Surcharge-based models may be seen as budget-conscious or focused on operational efficiency. These traits can resonate with some audiences but alienate others.
Businesses must align their payment model with their brand values. A high-end spa may risk undermining its luxury image with surcharges, while a small contractor may build trust by being transparent about rising costs.
Evaluating Long-Term Viability
In the short term, surcharge-based models offer clear financial benefits. Over time, however, they may require more customer education, updates to compliance requirements, and adjustments based on feedback.
Traditional models provide predictability and fewer customer service challenges but come with ongoing costs. If processing fees continue to rise, maintaining profitability becomes harder.
Businesses should regularly review transaction data, customer feedback, and industry trends to assess whether their current model still serves their goals.
Final Thoughts: Choosing the Right Model
The decision between traditional and surcharge-based merchant service models is not one-size-fits-all. It requires a thorough analysis of business type, customer demographics, competitive positioning, and financial objectives. Surcharge-based models can dramatically reduce operational costs but risk alienating price-sensitive customers. Traditional models prioritize experience and loyalty but carry a cost burden that may be hard to sustain.
Many businesses find success by piloting the surcharge model in select locations or offering a cash discount alternative. Open communication, legal compliance, and sensitivity to customer preferences are key to making either model work effectively. Ultimately, the right model is the one that aligns with your business identity and values while supporting sustainable growth and customer satisfaction.