A merchant can choose to add a surcharge fee to transactions, which customers will pay when they opt to use a credit card. These fees are unpopular amongst consumers, but is it legal to surcharge on credit cards? Only in some areas. The surcharge laws vary between states, and each card brand has its own rules that merchants must follow.

In general, a business can charge no more than what they pay in fees, they must post the fee amount at the point-of-sale, and they can’t penalize the use of one card brand more than another. Here’s the answer to common questions, including is it legal to surcharge on credit cards, and some important information you need to know. 

Is It Legal to Surcharge on Credit Cards?

There has been a great debate over surcharges and their legality over the past few years, which is why the first question many businesses ask is simply: Is it legal to surcharge on credit cards? The answer is complicated. 10 states still have laws on the books that say convenience and surcharge fees aren’t permissible, but recent court rulings have invalidated some of these laws. 

To date, only two states and one jurisdiction still outlaw the use of credit card surcharges: Connecticut, Massachusetts, and Puerto Rico. Everywhere else, you can choose to add a surcharge fee, but you’ll need to closely follow state laws and the rules set forth by card brands. How you disclose fees on signage and receipts, along with the amount you’re allowed to charge, are all outlined in the rule books.

When Can I Add a Surcharge Fee?

You can almost always add a surcharge fee to credit card transactions, but many rules control how you do so. Meanwhile, you can never charge a surcharge fee on a debit card or prepaid card transaction in the Visa or Mastercard network. 

When determining the surcharge fee customers will pay, you can choose between a brand or product level fee, but you can’t use both. A product-level surcharge will apply to a particular line of cards, like World Elite Mastercard. A brand-level surcharge applies to all credit cards in a given network, like all Visa credit cards. 

As you can imagine, calculating a surcharge fee can get pretty involved. The situation is made more difficult because each card brand explicitly states that you can’t create a surcharge that would make a consumer choose one brand over another. For instance, you can’t charge a fee for Visa transactions in a way that would encourage the use of Mastercard instead. 

Alternative Methods To Reduce Processing Costs

There’s no doubt that small businesses lose profits to credit card processing fees, and the rates are only going up. However, adding a surcharge fee may not be the right choice since it raises the cost for consumers–especially if you have nearby competitors who don’t charge such fees. These alternatives can be used in place of a surcharge (or sometimes in tandem) to give you more control over processing costs.

Set a Minimum for Credit Card Sales

Sometimes, the best way to avoid processing fees is to simply stop accepting credit cards–at least for small-ticket transactions. High fees and small-ticket sales just don’t go well together, so setting a minimum (of no more than $10) will help encourage customers to use cash or another form of payment instead of pulling out their credit cards.

If you have a lot of small-ticket transactions, this method can help bring down your processing fees by simply reducing the use of credit cards. However, it can also discourage shoppers from patronizing you–especially if they need to buy more than a couple of items to exceed the $10 mark.  

Add a Cash Discount

In a way, a surcharge penalizes shoppers who use credit cards. A cash discount takes the opposite approach by incentivizing shoppers who don’t. To make a cash discount work, you’ll simply increase your prices by two percent to three percent (roughly the equivalent of your processing rate) and then offer an equivalent discount to those who pay with cash.

While you must be careful in how you use surcharge fees to ensure that you don’t make one card brand seem better than another, there’s no rule against making another form of payment (i.e., cash) more appealing than using a credit card. Of course, the cash discount system requires you to increase prices, which could hurt your business if you don’t make the “cash price” clear to shoppers. 

Use a Convenience Fee Instead

A surcharge fee is based solely on the processing rate you pay, and you can apply it to certain credit card products or card brands. A convenience fee, on the other hand, can be charged for credit and debit card transactions, and it could exceed your processing costs. 

There are separate laws regarding convenience fees, but generally, you can only add one if a credit/debit card represents an alternative to the standard form of payment. For instance, a car wash that mostly deals in cash might charge a convenience fee for card transactions. Likewise, a stadium that sells most tickets at the window can charge a convenience fee to those who buy tickets online. 

If a convenience fee is permissible for your business and jurisdiction, it could be a better alternative to a surcharge simply because you have more flexibility in setting the amount and deciding when you charge it. For instance, a convenience fee can be a fixed dollar amount or a percentage rate. 

Take Control of Your Processing Fees

So, is it legal to surcharge on credit cards? In most states, yes, but it’s not always the right choice. In reality, if you’re struggling with processing fees, your best bet might be to compare merchant accounts and try to bring your costs down as much as possible before you start increasing the costs for your customers. 

NMA is a merchant advocacy group dedicated to reducing or eliminating the unnecessary fees associated with accepting credit card payments. Since 2004, NMA’s payment processing solutions have been delivering tailored solutions, best-in-class customer service, and high-quality service offerings for businesses across multiple industries. Whether it’s high-risk or low-risk, brick-and-mortar or eCommerce, NMA will create the best processing experience for your company.

For more information, visit us at our legacy.nationalmerchants.com or call (866) 509-7199