This is good news because it means you won’t have to inflate your base prices to cover payment processing fees.
That said, you can’t just decide and impose credit card surcharges overnight. It requires stringent adherence to regulatory guidelines and card network rules, including those related to credit card fees, from surcharge caps to disclosure requirements.
Learn how your business can capitalize on these transaction fees while staying on the right side of the law.
TL;DR
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- Surcharges are additional fees that a business adds to a customer’s bill when they choose to pay with a credit card.
- These fees help the business offset the cost of credit card processing fees, which the merchant typically has to pay to the card issuer and payment processor.
- For best results with your surcharge program, implement surcharges carefully by ensuring clear disclosures, training staff, and offering diverse payment options to ensure a smooth customer experience.
What is a Credit Card Surcharge?
A credit card surcharge refers to the additional fee that credit card-paying customers absorb in exchange for convenience. It helps businesses maintain their pricing structure while offsetting credit card payment processing expenses.
This practice promotes fair and stable pricing and guarantees you retain all your revenue. But the surcharge amount isn’t up to your discretion.
Credit card networks like Mastercard and Visa set a universal limit of 4% on these fees. But they advise businesses to check state laws for stricter limits or an outright surcharging ban.
Some states cap the surcharge rate to a set rate or dollar amount. The overarching rule is that it must not exceed the fees charged by credit card companies.
22% of businesses implement surcharging to offset credit card processing fees. Here’s how it differs from other related charges.
Surcharge fees vs. other card payment processing fees
Misclassifying one type of fee as another can be a costly oversight because each has its own governing rules. But merchants often confuse surcharge fees with other types of fees, so let’s sort out their differences below:
Fuel surcharges are a common example of additional costs incurred in different services and transactions, similar to ATM fees and handling fees.
Customers who choose non-standard payment options are subject to convenience fees. A good example is when a restaurant that only accepts in-person payments tacks on an extra fee for online orders.
Meanwhile, service fees apply to debit and credit card purchases but are waived if customers pay in cash. Merchants include these supplementary charges in their cash discount programs to motivate cash payments.
Shoppers pay convenience and service fees to businesses. These aren’t the same as the fees incurred by businesses when accepting credit cards.
Merchants pay interchange fees to compensate the cardholder’s bank (issuer) for the risk of managing credit card accounts. They also owe assessment fees to card networks for making use of their infrastructure.
Payment processors, if employed by the merchant, charge processing fees for handling the transaction authorization, settlement, and reporting services.
Surcharge fees help businesses minimize expenses from card-based transactions. If you lean into it, the next section will detail how this process works.
How Do Credit Card Surcharges Work?
Surcharging credit card payments involves specific regulations and practices. Here are 4 key areas to follow for a smooth and compliant implementation. Businesses often adjust surcharge amounts to offset costs imposed by regulations, ensuring legal compliance and maintaining customer transparency.
1. State regulations and allowable rates
You can’t levy a surcharge if your state prohibits it. While federal law permits certain surcharges, some states have established their own regulations that prohibit these fees. The first step is to confirm whether surcharging is legal in your state and, if so, what the maximum allowable rate is.
Surcharges can either be a fixed amount or a percentage of the transaction. The most common surcharge rate ranges between 1.6% and 2%.
Check your state laws for up-to-date information. You can do so by reading the government website’s surcharging FAQs or contacting your state’s Attorney General’s office.
Exercise prudence, and don’t cut corners. John Ray, a Professional Services Pricing Expert, has one clear piece of advice:
“Don’t assume anything. Don’t go to the ‘Google Law Firm’ to find out the details. Consult your business attorney to make sure you know all the details of what’s permitted, your disclosure requirements, and so forth.”
2. Credit card-only restrictions
Surcharges strictly apply only to credit card payments. Visa and Mastercard explicitly forbid surcharging on debit cards and prepaid cards to maintain consistency in processing costs.
Moreover, federal regulations like the Durbin Amendment within the Dodd-Frank Wall Street Reform Act oversee this prohibition. The amendment caps interchange fees for debit cards to reduce costs for merchants and consumers.
Non-compliance with these regulations can lead to enforcement actions from federal regulatory agencies. Card networks may also impose fines or penalties, including account suspension from the network.
3. Surcharge fee limitations
Credit card surcharging exists to cover transaction expenses–not to boost profits. But some 8% of merchants admit to charging more than their merchant fees. Don’t be like them.
Cardholders can report excessive surcharges to major networks like Visa, which can launch an investigation into your business. Today’s customers are more aware and vigilant about such practices. In fact, the National Restaurant Association noted that many restaurants would remove a surcharge from a bill if asked.
The bottom line: Keep your surcharge fees transparent and fair. The savings from the costs you would’ve otherwise paid are sufficient to boost your margin—if managed right.
4. Surcharge disclosure requirements
Legal requirements mandate businesses to inform customers of the surcharge before payment, ensuring that such information is not hidden in the fine print. You can communicate this through visible point-of-sale signage at checkout, verbal heads-up from staff, or on-screen alerts for eCommerce.
Verbal communication may not be enough for some states. Statutory requirements may expressly demand clear, written disclosure.
The surcharge amount must appear as a separate line item on the POS receipt. Transparency in billing practices helps customers understand what they pay for and provides a reference point in case of disputes.
4 Best Practices for Implementing Credit Card Surcharges
Adding these transaction fees without alienating customers is a challenge for large-scale and small businesses.
Implement surcharges carefully to avoid costly mistakes and build a more transparent, customer-friendly payment process.
Keep up with surcharge regulations
States update their surcharging regulations often in response to new legislation or industry practices. Track these changes and maintain thorough and up-to-date documentation of your compliance to avoid penalties.
CardX simplifies this process by integrating compliance features into your POS systems. It calculates and applies compliant surcharge rates at the checkout process, both online and in-store.
Employ clear disclosure and staff training
Place clear, conspicuous signs near the checkout area to inform customers of any surcharges. Visa offers printable templates to help with this. Additionally, train your staff with scripts or talking points to ensure consistent and accurate communication.
Offer diverse payment methods
Flexible payment options can help avoid frustration and lost sales. Customers can switch to avoid surcharges, such as paying with cash, mobile wallet, or a different card.
Listen to your customers
Survey and analyze customer feedback to gauge their response to surcharges. Alternatively, compare sales data before and after imposing these fees. If you see declining card purchases or increasing complaints, you may need to reevaluate your surcharge strategy.
Test surcharge policies with a pilot program in select locations or customer groups before a full rollout. CardX can help set these up in accordance with state and card brand regulations throughout the initial phase and beyond.
Start Surcharging with CardX by Stax
CardX by Stax delivers advanced solutions for surcharge management. We offer full registration and disclosure support, real-time adjustments, and card processing to seamlessly pass fees to customers.
Ready to maximize your credit card revenue? Check out CardX for businesses.
Request a QuoteFAQs about credit card surcharges
Q: What are credit card surcharges?
Credit card surcharges are an additional fee that businesses charge customers who choose to pay with a credit card. It’s calculated as a percentage of the purchase amount and is intended to offset the processing fees charged by credit card companies.
Q: Are credit card surcharges legal?
Yes, in the US all states allow surcharging except Connecticut, Massachusetts, and the territory of Puerto Rico. The legality can also vary internationally, with some countries allowing it and others prohibiting it.
Q: Why do businesses add surcharges for credit card payments?
Businesses add surcharges to credit card payments to cover the processing or interchange fees charged by credit card companies. These fees can significantly erode profits, especially for small businesses, making surcharges a way to maintain profitability.
Q: What are the guidelines for implementing credit card surcharges?
Merchants must notify their bank and the credit card companies of their intention to apply a surcharge at least 30 days in advance and in writing. Surcharges can only be applied to credit card transactions and must be clearly disclosed to the customer before payment.
