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.Learn More
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.
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 scheme 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.
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.
If you’re working with a payment processing provider like Stax, we 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. It helps to build empathy with your motives.
Once surcharging is in place, you’re legally obligated to post 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. 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.
Where is credit card surcharging illegal?
Unfortunately, Connecticut, Maine, Massachusetts, and Oklahoma do not currently allow surcharging.
Where are there anomalous surcharge rules?
California, New York, Florida, Texas, and Kansas, all have anti-surcharging laws. Class action lawsuits are being fought in many of these locations to have the laws overturned.
Colorado also has its own rules. The state’s laws give merchants the option to surcharge at 2% or implement a surcharge equal to the merchant’s processing costs, effectively passing them on to consumers.
In California, there is a unique process where customers can report merchants to the Attorney General if they feel their surcharging practice is misleading. Californians then must be extra cautious about following the state laws and card network policies—more on those below.
Meanwhile, New York and Maine allow surcharging if the merchant posts the credit card price in dollars and cents.
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 4%.
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.
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.
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.