Credit Card Surcharge: Fees, Laws & More Explained

Credit Card Surcharge: Fees, Laws & More Explained

The days of almost exclusively accepting cash payments are long gone, and electronic payments and credit cards are now the norm. Some new businesses are even opting out of cash altogether — deciding to save overhead costs by only supporting lean, cheaper merchant hardware.

And these changes are happening for good reasons, no one doubts that electronic payments have dramatically improved financial efficiency and consumer convenience, but with that “convenience” comes additional fees — namely interchange rates & processing fees.

And those fees really add up. So much so that many businesses have opted to add a credit card surcharge to payments conducted with cards to compensate for this loss. This is typically a low percent or flat rate.

If you’re considering this in your business, you need to be careful. The laws around surcharges change often and vary state by state. Customers aren’t always thrilled by the practice, either.

Keep reading to figure out if adding a surcharge is right for your business.

What is a credit card surcharge?

To be clear, a surcharge is any fee added to a transaction to compensate for credit card fees.

This definition doesn’t apply to any type of transaction — only credit cards.

This is different from a convenience fee that merchants use to charge for the medium of sale vs. the type of sale.

For example, a mechanic charging an extra $3 online regardless of payment type is a convenience fee. They are charging for the convenience of paying online instead of in person or on the phone — not because it was paid for with a credit card.

Surcharges are specific to credit cards. Convenience fees are not.

Similarly, credit card minimums are not surcharges. As long as your minimum is below $10 and credit cards are accepted regardless of association, you’re free to do that if you wish. Consumers are also much more accepting and used to credit card minimums, so this can be a useful option for businesses trying to save on credit card fees.

Can you apply surcharges in your state?

In 2013, card member associations dropped their personal bans on surcharges and left it up to the states to decide their legality. This transfer of responsibility resulted in a somewhat complex web of laws and rules between states and card member associations.

At the time of writing, there are currently 10 states with an outright ban on surcharges:

  • Colorado
  • Connecticut
  • Texas
  • Oklahoma
  • Florida
  • Maine
  • Kansas
  • Massachusetts
  • New York*
  • California*

In these states, it is illegal to charge an additional fee on top of a credit card purchase, but many merchants choose to offer a “cash discount” instead to get around this. That workaround is also being contested in some states, so use caution when employing that strategy.

While most of the listed state’s laws are similar, New York and California are a bit tricky.

New York

As of mid-2017, the Supreme Court heard a case on the legality of the surcharge ban in New York and ultimately decided to defer the case back down to lower courts to be tried on the basis of free speech as opposed to the original “business conduct” position. In other words, treat New York as if surcharges were illegal until you hear otherwise.

California

In early 2018 California courts have determined that a ban on surcharges is unconstitutional for the specific set of businesses that brought their case. While this doesn’t mean the ban is entirely overturned, it does mean a huge victory for merchants supporting surcharges and this will most likely affect the rest of California businesses soon.

To get more info on that specific case, check out this courtroom rundown here.

If you live or conduct business in California, it would serve you well to keep a close eye on future cases.

Keep in mind; if you conduct business in multiple states, you can also only charge surcharges in those specific states.

Your headquarters or where you applied for your license is irrelevant.

Should you apply surcharges?

Even if you’re already sold on applying surcharges, it’s smart to take a long look at how adding them could affect your business. Sure, saving money on processing fees sounds great, but you need to think of the larger picture — most specifically your customers.

Here’s the deal:

Customers don’t like surcharges. At all.

Many think the practice is antiquated and that credit card fees should be eaten by the businesses themselves and reflected in their existing prices if need be. Most customers won’t even read that far into it; it will strictly be an inconvenience.

With this in mind, let’s look at the pros and cons.

Pros of Applying Surcharges:

  • You save money. Plain and simple, with every credit card transaction you will be recouping all or at least a portion of the processing fees costs. This adds up, as you know, which is why you’re reading this blog.
  • If you know you’re saving on processing fees, you could pass that “discount” onto consumers by lowering prices. Having cheaper sticker prices may help you appear more competitive, even though the consumer will be making up that difference through checkout fees (surcharges).

Cons of Applying Surcharges:

  • Charging extra on a transaction isn’t a great customer experience, and consumers are generally against surcharges. Even if you’re clear about it up front, it can put a sour taste in consumers mouths knowing they have to pay another couple percentage points if they want to pay a certain way. Today’s payment processing world is all about customer choice and convenience. Having a method restricted is neither of those things and has the potential to negatively impact your business.
  • You’ll need to be keeping an eye on surcharge laws & card member association rules. These tend to change, and in order to avoid fines & other penalties, you’ll need to spend time making sure your business is operating legally.

We tend to fall on the side of surcharges being more than trouble than they’re worth, but if you have multiple locations and are doing business where surcharges are legal, you could test this by adding surcharges and tracking revenue & customer retention over a set period.

How to apply surcharges

If you can and want to apply surcharges, then there are specific rules you need to follow. These are dictated by the card member association you’re surcharging for. Actually applying the surcharge should be an option available in your POS. If it’s not, then you should either contact your POS company or look into switching systems.

You’ll need to research the individual rules for each type (Mastercard, Discover, Visa, etc.), but there are rules that are universal across all card types:

  • You must notify the brands before you start surcharging. Some require up to 30 days notice.
  • You should also tell your acquiring bank (your business account and/or merchant account bank).
  • You can’t stack surcharges. You must either commit to adding a surcharge to all cards of a certain brand (Visa, Mastercard) OR a certain card type regardless of brand (reward, charge, etc.)
  • Set up your POS to print out a “checkout fee” separately on your receipt. Your POS should support this, but if it doesn’t you may have to look into getting a new POS.
  • Some card member associations require you to post a sign on your front door telling customers you apply a surcharge. Check each association for this distinction, and the association should give you all the information you need when you reach out to them.
  • You can’t charge more than 4% OR the total processing fees associated with each card. In other words, you can’t be directly profiting from an “inflated” compensation surcharge.
  • You can’t apply a surcharge to debit cards or prepaid cards — even if the debit card is run as credit.
  • Surcharges are included in refunds! Don’t forget this.

For the individual card member association rules, you can view them at these links:

Mastercard

Visa

Discover (contact them directly)

American Express (contact them directly)

It’d be smart to collect all of the rules and print them out to make sure you’re covering the bases as you implement credit card surcharges.

The last thing you want to do is get in trouble and lose your card member association privileges!

Conclusion

It’s safe to say credit cards aren’t going away. As long as you’re in business you will be accepting them, and you need to consider your long-term brand image to consumers. To the modern consumer, surcharges are seen as selfish and inconvenient, and the younger your demographic the stronger that reaction will be.

That doesn’t mean you can’t reduce your credit card processing costs, however. Offering cash discounts, switching to interchange plus pricing instead of a flat rate, fighting chargebacks, and more can lessen the burden and put more money back in your pocket.

As long as you’re diligent about your pricing and processing system, you’ll be just fine.

We hope this helps, and best of luck!

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