We’ve created a credit card surcharge guide for merchants about the laws and rules for 2021. There’s no doubt that merchants often have tense relations with banks, credit card processors, and card associations. Merchants often find themselves paying all kinds of fees and dealing with major limitations these organizations impose, and it came to a head in a huge class-action lawsuit a while back.
In that lawsuit, merchants alleged Visa and Mastercard were charging them excessive fees. The surcharge rules they laid out prevented them from charging a surcharge to customers to help cover the fees and kept them from giving customers a less expensive alternative. This massive lawsuit continued for a decade when merchants finally got the settlement they deserved.
This lawsuit also laid the groundwork to give merchants new means of recouping the costs of credit card transactions, and card associations now have new rules. Despite all of that, though, charging a credit card surcharge is anything but simple. Aside from the rules that vary from one credit card processing company to the next, there are also state laws and limitations to contend with, resulting in pros and cons for you and your customers.
Are you interested in learning more about credit card surcharges? We’ll explore all the considerations, benefits, and options in this guide.
What is a Credit Card Surcharge?
A credit card surcharge is a small fee added to a customer’s transaction when they pay with a credit card. The purpose of the surcharge is to help cover the merchant’s processing costs. The surcharge acts to prevent the merchant from losing money to credit card fees while giving the customer a choice to either pay with a credit card and cover the surcharge or to choose a non-credit payment method, so they don’t have to pay.
You cannot charge surcharges to prepaid cards or debit cards. Even when a transaction is “run as a credit” (i.e., signature debit), the transaction is still exempt from a surcharge due to the Durbin Amendment of the Dodd-Frank Wall Street Reform and Consumer Protection Act’s restrictions.
The Durbin Amendment lays out multiple regulations relating to debit cards, including interchange fee caps. However, you won’t see savings on interchange fees until your processor supports PIN debit. Those using a flat-rate or tiered pricing processing plan also won’t see those savings.
Surcharging vs. Cash Discounting
When you’re looking for merchant services, “zero-fee” or “free” processing services use surcharging as a way to offset your costs. Another relevant term you’ll hear is “cash discounting,” which is an incentive to get customers to pay in cash by giving them a discount equal to the surcharge fee if they use a debit card or paper check to pay. It’s important to note that these methods are rarely used simultaneously.
If you use surcharging, you’ll advertise products at a certain price, and everyone who pays that price, except those purchasing with a credit card, will pay 1% to 3% more (whatever your fee is). On the other hand, stores using cash discounting will advertise products at a price that takes the credit card processing fee into account and subtract the fee for those paying in cash.
These methods help pass a merchant’s processing costs to the consumer, but here’s an essential distinction: Cash discounting is legal across the United States while surcharging is still prohibited in some areas. There are also pros and cons associated with each of these methods, so let’s explore further.
Surcharging vs. Convenience Fees
Convenience fees are a type of fixed-rate fee that some businesses add to a customer’s bill when they choose to pay via a credit card. Unlike a surcharge, a convenience fee is not tied to a company’s actual processing fees. However, credit card associations have rules specific to convenience fees if you’re interested in pursuing one.
Laws and Regulations by State
Before we delve further into the specific surcharging regulations imposed by each credit card issuer, let’s explore the list of states where surcharging is illegal and get into how the laws vary from one state to the next.
States Where Surcharging is Illegal
In seven states, anti-surcharging laws can still be found on record, but they’re no longer enforceable after recent court decisions contradicted them. As of now, there’s only one U.S. territory and four states that still disallow surcharging. Those are:
- Puerto Rico
If your business is in one of these places, you cannot legally impose a surcharge. However, you can still use the cash discounting method if you’d like to offset your processing fees.
States With Additional Requirements
Two states require you to provide additional disclosures if you’re surcharging:
- New York
In these states, you must post the cost of cash transactions and the cost of credit card transactions (not rounded up or down and using the exact dollar and cents price). This requirement is in addition to those imposed by Visa, Mastercard, American Express, and Discover, which ask you to notify the customer at the point of sale (i.e., at the register), specifying the surcharge fee.
Special Exceptions and Limitations
Credit card surcharge laws are anything but cut and dry. Here are some additional elements to consider.
Government Agencies & Educational Institutions
The surcharging regulations and limitations you’ll learn about in this guide typically only apply to consumer businesses. There are separate regulations for government and educational agencies, and surcharging may even be permissible for these agencies in the states listed above.
Businesses with Multiple Locations
If you have a large business operating in multiple locations across the country, surcharging laws impact each location individually. For instance, you can add a surcharge in states where it is permissible but ensure compliance with the specific laws and regulations of each state where you choose to enforce a surcharge.
Credit Card Issuer Regulations
After checking the surcharging laws in your state, you’ll need to consider the cards that you accept and the policies of each one. Unfortunately, each card brand has its own rules and limitations, so you’ll need to understand the requirements of each before you start surcharging.
Card associations work hard to ensure that merchants aren’t discouraging customers from using their cards over other card brands. However, this never affects your ability to encourage other payment methods (like cash or debit) over a credit card. Some general guidelines across all card brands include:
- Before you begin surcharging, you must notify the card association and your merchant services provider in advance. This notice must be given in writing at least 30 days before you start charging. American Express is the only card brand not requiring this notice, as long as you comply with other AMEX rules.
- The surcharge fee cannot be more than the effective rate for your credit card transactions and never more than 4%. This means you can never profit from a surcharge fee, but you can use it to recover your baseline costs.
- You’ll need to post notices inside your store at its entrance and the point of sale (i.e., the register). If you’re dealing in eCommerce, you must have a notice on the checkout page.
- You must list the surcharge fee on the receipt as its own line item, and it needs to be included within your network authorization request and settlement. Again, American Express is the only one that differs in this requirement.
- Visa and Mastercard both require you to choose brand-level surcharges or product-level surcharges, but you cannot use both. Brand-level surcharges would apply to all Visa cards, for example, while product-level surcharges would only apply to certain lines of cards.
When in doubt, reach out to the card association or your merchant services provider directly for assistance.
Credit Card Surcharge Best Practices
After sending the proper notifications, you need to ensure your payment gateway or processing system is set up to charge the fee in accordance with your card network’s rules. As you go through the phases, be sure to follow these best practices.
Send Written Notification
When notifying your processor, you’ll want to reach out directly to your merchant account representative and get their guidance and advice on proceeding. You’ll need to provide written notice if notice is necessary, so don’t expect a phone call to suffice. Your account representative can tell you where to direct the request. If you don’t have a dedicated account representative, any customer service rep should help.
Post Notices for Customers
When adding a surcharge, you must notify your customers of the fee, both at the entrance to your store and at the point of sale. Ecommerce stores must post the notice on the checkout page and include the fee on the receipt.
The notice must explain when this surcharge will apply (i.e., all credit card transactions, all Visa transactions, etc.). The notice should also include the surcharge rate and a comment reassuring customers that the fee does not exceed the processing fees you actually pay.
You’ll find a resource page on the Visa website to help you implement a surcharge. This resource page even provides downloadable signage that you can post, but keep in mind that this signage is specific to Visa and may not apply to other brands.
Document Your Surcharges
Visa, Mastercard, and Discover all require your system to add the surcharge as its own line item. For an invoice, there are no rules requiring how you word the credit card fee. The receipt should always list the surcharge whether you’re selling online or in person. For these card brands, you must report surcharges to the processor and the card networks. So, before implementing a surcharge, make sure your processing system can support these requirements.
Pros and Cons of Surcharging
It only makes sense for merchants to recoup some of the processing fees they pay when accepting credit cards, especially if they’re a small business and/or most of their patrons use a credit card to make their purchases. However, consumers and merchants alike have mixed opinions when it comes to these fees.
Credit card fees can quickly cut into your profits, especially if you’re running a small business. By surcharging, you’re able to offset those fees up to 4% or the full amount of your fee, whichever is greater. So, while you can’t earn money from surcharging, you can use it to cushion your margins, so processing fees no longer cut into your profits.
With the average credit card processing fee ranging widely from 1.3% to 3.5%, your business could recoup up to $35.00 per $1,000 in profits, which is a hefty amount for small businesses. If you’re bringing in $30,000 per month in credit card sales, surcharging could save you over $1,000 in fees each month.
Higher Cost to Customers
As a business, it’s easy to focus on how much you can save in fees, but the flip side to that is the cost customers will incur. By far, the biggest and most obvious downside to surcharging is that you’re unfortunately passing your fees on to those who keep you in business, and they may not be happy about that. In fact, the biggest thing holding many merchants back from surcharging is fear that they will lose business.
In reality, surcharging is becoming more common, and consumers are growing understanding of it, especially since they choose to pay with debit, cash, or check as an alternative at most stores. Still, if you’re worried about customer backlash, you may decide cash discounting (which incentivizes non-credit card purchases) may be better than surcharging (which is often seen as penalizing credit card purchases).
Debit Card Fees Aren’t Covered
If your business processes most of its transactions as debit card purchases, then it’s simply not worth implementing surcharge fees. You’re not able to charge a fee for debit card transactions, so implementing a surcharge likely won’t make a big impact on your profits if you primarily accept debit cards.
So, if you’re trying to save on fees and you mostly process debit card transactions, consider a convenience fee that applies to both debit and credit card transactions (given that regulations allow it) or a cash discount that applies to cash and check purchases. To help recoup fees, the cash discount should be no more than the fee you pay to process debit card transactions.
Is Surcharging The Right Move?
As you think about the potential risks associated with implementing surcharging, remind yourself that it can make a major difference, especially if you’re working on thin margins. However, the most important thing is that you consider your customers and the competitive landscape before making a move that could potentially upset those who keep your business moving.
According to Business.com, “A creditcards.com study found that consumers overwhelmingly respond that they aren’t willing to pay fees to use credit cards. It’s possible that consumers would simply adapt after some initial complaints. Still, if there are convenient alternatives such as a nearby business that doesn’t surcharge, you could end up losing those customers.”
This isn’t to discourage you from surcharging but rather to remind you that you should take steps before implementing this change within your business.
- Are competitors charging fees for credit card transactions? If it’s common practice in your area, it will likely be less of a shock to customers.
- Do you have direct competitors your customers can go to, and do they have surcharge fees? If it’s convenient for a customer to opt for a competitor without a surcharge fee, there’s a risk they will do so.
- How will your prices compare to competitors once you add a surcharge fee? If your prices are higher, you’ll need to think about what makes you stand out to help you keep business.
Ultimately, the best way to determine if surcharging is right for your business is to reach out to your customers, ask them directly, add a feedback box to the counter, or ask them to take an informal survey. Make sure you let your customers know you won’t profit from the surcharge fee, and it only exists to cover your high costs to garner understanding.
With some customer education and honest communication, you can determine whether surcharging is the right option for your business or not.
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