Did you know that the delinquency rate for small businesses has reached a record high owing to inflation and declining revenues? A recent report by Alignable found that 43% of SMBs couldn’t pay rent—on time and in full—in April 2024.
This is why, now more than ever, US merchants must manage their operational costs meticulously. One way to do that—though often overlooked—is to optimize their payment processing to reduce fees associated with credit card purchases.
Card companies like Visa, Mastercard, Discover, etc. charge interchange fees which, on top of other credit card processing fees, can eat away at your profits. As such, credit card surcharging can be beneficial for offsetting these costs. With it, merchants can transfer the processing costs to customers who choose to make credit card payments.
It’s interesting to note that surcharging was illegal in most states until 2013. Following a landmark judgment, the courts forced credit card networks to allow merchants to implement surcharging.
However, card brand rules and state and federal laws have been established to prevent merchants from abusing this privilege. Non-compliance can lead to hefty penalties and even suspension of their merchant accounts.
In this article, we’ll explore Visa’s rules around credit card surcharging and what merchants need to know about them.
TL;DR
- Card companies like Visa, Mastercard, Discover, etc. charge interchange fees which, on top of other credit card processing fees, can eat away at your profits. As such, credit card surcharging can be beneficial for offsetting these costs.
- A credit card surcharge is an additional fee that a merchant adds to a customer’s final bill if they choose to pay with a credit card. Merchants should be aware of Visa’s surcharging rules as non-compliance can lead to fines ranging from $50,000 to $1 million.
- Visa’s surcharge rules around disclosure, compliance, options (brand-level/product-level), notifying acquirers, surcharge cap, etc. are the most important ones to be mindful of. All this can be challenging, so it’s best to partner with a surcharging expert like CardX by Stax.
Understanding Visa Surcharge Rules
Before we go any further, let’s discuss what a surcharge means. A credit card surcharge is an additional fee that a merchant adds to a customer’s final bill if they choose to pay with a credit card. Surcharges allow businesses to recoup some or all of the costs of processing credit card payments.
As such, card networks like Visa aren’t too fond of surcharging. They believe surcharging might discourage cardholders from using their credit cards. Obviously, low credit card usage hurts card companies’ bottom line.
Per the latest reports, Visa wants to enforce its surcharging rules more seriously. It would like to increase interchange fees, but also control how much merchant surcharge can be added to customers’ bills so they don’t get discouraged from using credit cards.
Merchants should be aware of Visa’s surcharging rules as non-compliance can lead to fines ranging from $50,000 to $1 million. Visa is one of America’s top four credit card issuers, and globally the most widely used card processor. Hence, merchants can’t afford to ignore Visa’s directives.
Overview of Visa’s Surcharge Policy
The following summarizes Visa’s surcharge rules in a nutshell:
- Disclosure – Businesses must disclose their surcharging program to customers. In essence, customers need to be fully aware that a credit card surcharge will be applied when they checkout at a point of sale (POS). This applies to both in-store and online purchases. Signage must be present at all entrances and points of sale and the surcharge must appear as a separate line item in receipts.
- Compliance with state-level surcharge laws – Merchants must ensure that they follow state laws when implementing a surcharge program. Although surcharging is now allowed in most US territories and states, some states, like New York and California, have additional rules and restrictions. If a business has stores in multiple states, then each store must follow the surcharging rules of the state it is located in.
- Surcharge options – Businesses in the US can choose brand-level or product-level surcharging, but not both. A brand-level surcharge means merchants can apply a surcharge to all transactions made via Visa credit cards. Product-level surcharging allows businesses to surcharge a certain credit card type/product issued by Visa.
- Notifications – Before implementing a surcharging program, you must notify your acquirer at least 30 days prior. Once implemented, the surcharge amount must also be mentioned in a dedicated data field in transaction messages that go out to Visa. Starting April 15, 2023, merchants only have to notify their acquirer 30 days before they start surcharging. They don’t have to notify Visa anymore.
- Surcharge rate limit – To improve the customer experience, Visa has reduced the surcharge cap to 3%, effective April 15, 2023. Earlier, the surcharge cap used to be 4%. Of course, these limits can also vary by state—Colorado caps surcharges at 2%. As such, Visa’s directive to businesses is to limit the surcharge to either their merchant discount rate (MDR) for the credit card or 3%, whichever is lower.
- Restricted to credit cards only – Surcharges cannot be added to Visa debit cards and are limited only to credit card transactions. Prepaid cards are also exempt from surcharging.
How to Implement a Surcharge
Implementing a credit card surcharge program while ensuring compliance with all applicable federal and state laws and card brand rules can be difficult for small businesses. It’s best to partner with a payment processor like CardX by Stax that not only helps you handle all the paperwork but also ensures compliance with all regulations.
Let’s look at the basic steps of implementing a surcharging program.
- See all rules regarding disclosing your surcharging program to your customers and ensure that your stores follow them. There are specific rules regarding signs and where they need to be placed. Make sure that legible signs are posted both online and offline. You must post signs at all points of entry and points of transaction or sale.
- Work with your merchant account provider or payment processor to notify card networks and acquirers 30 days before you start adding surcharges. These companies need a written notice that your payment processor can take care of.
- Analyze your business data to understand what type of surcharging works for you and the surcharge rate you should apply. Also, be prepared for how surcharging might affect your customer base.
Impact on Merchants and Customers
The latest changes made by Visa seem advantageous to customers as they limit the surcharge fee. Besides surcharging, businesses can use other strategies to minimize the cost of processing credit cards.
Cash discounting is a great way to encourage customers to pay by cash so merchants can avoid credit card processing fees. Cash discounts are legal in all states, even in ones where credit card surcharging is illegal, like Connecticut.
Final Words
Staying on top of ever-changing surcharging rules can be challenging. That’s why it helps to work with companies like CardX by Stax that can help you comply with all regulations.
Visa also provides extensive documents for merchants regarding changes in their credit card rules. Keep referring to them regularly. For more information, contact us today.
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