Passing credit card fees onto customers has been hotly debated, but most of the country has agreed: Credit card surcharge should be available to merchants. Even if the consensus is out that it’s okay for merchants to not incur costly transaction fees if accepting credit card payments, it can be difficult to understand how to collect surcharge fees from your customers and retain your customer base.
If you’re not sure where to start, keep reading to find out the benefits of implementing surcharging, how to ensure legal compliance, and how you can use technology for smooth sailing in the surcharging landscape.
TL;DR
- Surcharging allows merchants to pass on credit card fees. Customers who want to use their credit card have to pay an additional fee covering the processing costs. It makes it easier for merchants to make the switch to accepting non-cash payment methods like credit cards or contactless payments, which are often seen as more convenient for customers, but can come at a steep price.
- It’s important to consider any drawbacks or consequences as it relates to your customers before implementing (like detracting from customer satisfaction or loyalty), so if you’re working in an extremely price-sensitive market, carefully think of the different possible scenarios on how surcharging could play out.
- If you opt to introduce surcharging, you have to pay attention to the legal limits of this scheme, as these can change from state to state. Note that surcharging cannot be used in any way to make a profit; it can only be used to cover the cost of your processing fee.
As of the time of publication, this practice is allowed in all but two states; Connecticut and Massachusetts are still working to turn the tides. Everywhere else, surcharging is officially on the menu.
What is Credit Card Surcharging?
For anyone new to the term, surcharging is a payment processing option allowing merchants to pass on credit card fees. Customers who want to use their credit card have to pay an additional fee covering the processing costs.
You may have come across no-fee credit card processing. This is typically surcharging wrapped up in a packaged service—usually with an increased merchant fee.
Setting up a surcharging program can be a bit complicated, but once done, it runs automatically. Point of sale terminals are reprogrammed (or pre-programmed) to add the appropriate fee without manual input from merchants.
Surcharge rules do differ from state to state. There are federal laws and state laws that need to be followed to implement surcharging legally.
Why Should Merchants Consider Implementing a Surcharging Program?
Credit card processing fees take a significant chunk out of your bottom line. Businesses of all sizes feel the brunt of it. But small businesses, in particular, can be crushed by these fees.
To be competitive, you have to accept card transactions. There’s no way around it. The only choice some merchants really have is adding surcharge fees instead of fully shouldering the processing costs.
Customers can choose to pay the fees or select an alternative form of payment. Cash payment incentives are a popular alternative.
What are the Benefits of Using a Surcharging Program for Merchants?
There are several reasons why you should consider implementing surcharging, especially if you’re a small business owner. There’s no denying that it’s an ideal strategy to help maximize your revenue and improve your cash flow, as you’ll be able to save upwards of thousands of dollars via processing fees each year. If you’re running a business with thin margins, reducing your overhead and fees wherever possible can be absolutely critical.
Credit card surcharging makes it easier for merchants to make the switch to accepting non-cash payment methods like credit cards or contactless payments, which are often seen as more convenient for customers, but can come at a steep price. Since the costs are relatively miniscule as a one-time purchase for consumers, chances are high that they won’t see it as an inconvenience and shop elsewhere (as long as you’re upfront about the fees!) As long as you apply the rate consistently across card brands, surcharging can provide a wealth of benefits to an (e)Commerce merchant.
Can Credit Card Surcharges Be Passed to Customers Using a Debit Card?
No. Surcharge fees cannot be added to debit card transactions or prepaid cards. This makes debit cards one of the alternative forms of payment your customers could select. Sure, it does mean you have to pay the debit card processing fees to your payment provider. However, debit card processing fees are capped, and the interchange rates are less than credit card processing rates.
What’s the Difference Between Convenience Fees and Credit Card Surcharge Fees?
As we now know, credit card surcharges are fees added to the customer’s bill to cover the credit card processing fees. They apply exclusively to credit card transactions.
Convenience fees are a different approach entirely. They relate to fees that can be added to the purchase customers pay through “alternative” methods.
Services businesses that typically accept payments in person may have some cases where clients want to pay over the phone. As this is a card-not-present transaction, it incurs extra fees. The same is true for retailers or cinemas that also transact primarily in person. When transactions are put through online, that business may be eligible to charge a convenience fee, as it is outside of the typical payment method.
Like surcharging, credit card companies and state laws determine which businesses, in which states, can apply convenience fees.
How Does Surcharging Compare to Other Fee Management Strategies?
Surcharging has both pros and cons, so if you’re on the fence about implementing it, here are the other main fee management strategies out there (besides flat-out raising prices!), along with our thoughts on how effective they might be.
- Cash discounts: If customers pay by cash, businesses don’t have to worry about credit card processing fees at all, which can help save businesses a significant amount of money in the long run. However, with non-cash payments constantly on the rise, most businesses will lose out on revenue if they only take cash. While you can offer a cash discount as an incentive, solely relying on this to reduce your fees is likely to backfire.
- Alternative payment methods: Payment methods like eChecks, digital wallets, and ACH often come with lower processing fees than credit cards. However, these aren’t popular payment methods for all small businesses, especially for brick-and-mortar locations.
Minimum purchase requirements: By setting a minimum amount to be purchased when using credit cards, smaller businesses can help to minimize the cost of processing fees on smaller transactions. This can be a great middle ground that allows you to accept credit cards without high expenses.
What are the Steps Involved in Starting and Running a Credit Card Surcharging Program?
Setting up a credit card surcharging program requires a reasonable amount of work. If you endeavor to do it all yourself, you have to follow these steps carefully. Also, be sure to check your local rules and follow them.
Plus, it’s important to consider any drawbacks or consequences as it relates to your customers before implementing (like detracting from customer satisfaction or loyalty), so if you’re working in an extremely price-sensitive market, carefully think of the different possible scenarios on how surcharging could play out.
If you’re working with a payment processing provider like Stax, they can take care of much of the following. Still, there are best practices that every merchant should consider to keep their customer relationships strong as they transition.
Step by step, here is all you need to do to set up your credit card surcharging program:
1. Explore your options with your merchant service provider
Not all merchant account providers have the capabilities or services for surcharging. This means you may have to switch vendors to set up your surcharging program.
Even if they offer a surcharging service, a review is wise to ensure you’re getting the best solution. If you have to swap, consider a provider like Stax that helps you with the setup and offers flexible solutions.
2. Notify the appropriate people
When you set up surcharging, most card networks need written notice at least 30 days before its introduction.
The easiest way to approach this is to call your merchant account provider and ask who you need to notify. Providers with strong surcharging solutions will have all the necessary information on hand to save you searching online.
3. Plan your communication with customers
There is no legal requirement for you to tell customers ahead of time that you plan to introduce surcharging. But it is advised. Communicating this intention to customers before it’s in place shows respect. It is a window where customers can feel grateful they don’t have to pay fees just yet. It also gives them time to consider why you would introduce this. Basically, it helps to build empathy with your motives.
By making it clear that you’re not profiting off of surcharging and perhaps offering other alternatives to surcharging (more on that in the FAQ below), you can have a smooth transition into implementing surcharging.
Once surcharging is in place, you’re legally obligated to post surcharging signage. These go at the entrance and the register and must be clearly visible. In this disclaimer, you need to highlight the rate charged and communicate that it is not more than the processing fees. You also can’t use complicated legalese to hide the fact that you’re implementing surcharging: it must be easy to read and understand. Online businesses must have this notification on the checkout page.
If you plan to set this up yourself, you need to call Visa or Mastercard to request this signage.
4. Program your terminal
Surcharging laws require fees to be listed as separate line items on the cardholder’s invoice and the network authorization request and settlement. This needs to be the dollar amount. Not just the percentage added to the transaction amount. For this, your point of sale terminal will need to be reprogrammed, or you may need a new one with this setup.
Your merchant account provider is again your best resource to learn about this. Here at Stax, we can reprogram existing terminals and also have pre-programmed options.
Any provider programming your terminal will know the rules for your region. Invoices will automatically list this extra line item. Your terminal will also be programmed to differentiate between credit and debit cards. Even if credit is selected, no debit cards will incur fees.
Surcharging State Law and Card Brands FAQs
If you opt to introduce surcharging, you have to pay attention to the legal limits of this scheme. These can change state by state.
What is a credit card surcharge program?
A credit card surcharge program allows merchants to add a small fee to a customer’s bill when they use a credit card for payment. This fee is meant to cover the cost of processing the credit card transaction, which merchants typically pay to credit card processors or banks. The surcharge program must comply with the credit card networks’ rules and applicable laws.
What is a credit card surcharge for?
The primary purpose of a credit card surcharge is to offset the merchant’s cost associated with processing credit card transactions. These costs can include interchange fees, assessment fees, and other charges that credit card companies impose on merchants for each credit card payment.
Who benefits from credit card surcharge?
Both merchants and, indirectly, consumers can benefit from a credit card surcharge. Merchants benefit directly by recouping the costs of processing credit card payments, potentially improving their profit margins. Consumers can benefit indirectly if merchants are able to lower prices or avoid increasing prices due to the offset of transaction costs.
Q: Can you pass on credit card fees to customers?
Yes, merchants can pass on credit card fees to customers through a surcharge, provided they comply with the rules set by credit card networks (such as Visa, MasterCard) and applicable laws. Merchants must clearly disclose the surcharge to customers before the transaction is completed.
Q: What is the maximum credit card surcharge?
The maximum credit card surcharge is typically capped at the cost of the transaction to the merchant or a percentage defined by credit card networks, usually around 3%. This cap is designed to prevent merchants from profiting from the surcharge and to keep fees reasonable for consumers.
Q: What states is it illegal to charge a credit card processing fee?
At the time of writing, surcharging is legal in all US states accept Massachusetts, Connecticut, and Puerto Rico
Q: What is the difference between a surcharge and a processing fee?
A surcharge is a fee added specifically for the use of a credit card, intended to cover the cost of processing that credit card payment. A processing fee, on the other hand, can refer more broadly to any fee charged by a payment processor to handle transactions, not necessarily passed directly to consumers. Surcharges are usually disclosed and charged to consumers choosing to pay with a credit card, while processing fees are typically costs borne by the merchant for facilitating electronic payments.
What are the common surcharging rules?
Across all states, there is a limit on how much can be added as a surcharge on credit card purchases. Colorado is the outlier, with a 2% cap. The remaining states are capped at 3%. However, surcharging cannot be used in any way to make a profit; it can only be used to cover the cost of your processing fee.
It can also not be used on debit card transactions. That means even if you have a client that completes a transaction using a signature debit card (meaning that it’s processed like a credit card transaction) you legally cannot implement credit card surcharging.
Visa and Mastercard offer two different surcharging options: brand-level surcharges or product-level surcharges. You cannot do both.
Brand-level surcharges would have all Visa and Mastercard branded credit cards charged at the same surcharge rate. It applies across the brand.
Product-level surcharges apply to specific types of Visa or Mastercard credit cards. For example, you may wish to apply product-level surcharging to Visa Signature or World Elite MasterCard.
In short, before you implement surcharge fees, it’s important to carefully review federal and state laws to ensure strict adherence with all regulatory requirements.
Still confused on how to best insure compliance with all requirements? Here’s a checklist to keep in mind when implementing surcharging:
- Notify major credit card institutions in writing when you intend to start surcharging.
- Clearly disclose the fees before a transaction is made in simple language (advance notice is not legally required, but strongly recommended).
- Surcharges must be listed on the receipt, and should be displayed both as a percentage and dollar amount.
- You cannot charge over 4%, nor can you make a profit off of surcharging–you must go with whatever amount is lower.
- You cannot implement surcharges for debit cards.
To best simplify compliance, use a legal payment processor like Stax’s CardX to ensure strict adherence to all credit card surcharge laws.
Planning to Implement Credit Card Surcharging?
With the forced shift to cashless payments in recent years, the case for surcharging has gained popularity. Switching to card transactions may have been convenient for customers, but small businesses really felt the sting.
That’s why surcharging—when implemented correctly and ethically—is a practice worth considering. By using PCI-compliant software and hardware, you can easily navigate the complex landscape of credit card surcharging with confidence. But how can you best use technology to streamline your payment processing solutions?
With CardX by Stax, we make it seamless with 100% compliance with state and federal laws. Plus, we offer automated credit card type detection to instantly ensure the correct rate for eligible transactions (no accidental surcharges for debit cards!), and 0% cost credit card surcharging, we make it easy to save on credit card processing in no time. And thanks to our powerful data and reporting dashboard updated in real-time, making informed decisions to sustainably grow your business has never been easier.
If you’re looking to save on credit card fees through surcharging, get in touch with Stax—we’ll help you get up and running with the right program for your business.
