Your Complete Guide to Credit Card Surcharges
It’s safe to say that merchant relations with credit card processing companies, the card associations, and the banks, aren’t always friendly — nor would you expect them to be when merchants find themselves subject to all sorts of fees and limitations imposed by these organizations. And every so often, things reach a peak — say, the massive class-action lawsuit that merchants filed against Visa and Mastercard, alleging that they were being charged excessively high fees and guidelines kept them from adding a credit card surcharge or pointing customers at less expensive options.
After a decade of fighting in court, the parties reached an expensive settlement — and more importantly, the lawsuit laid the groundwork to allow merchants to apply surcharges to credit card transactions. The card associations have changed their rules on this often-contentious matter as a result of the lawsuit. So even though the settlement was vacated in 2016, it has little bearing on the practice of surcharging.
Surcharging is merely the practice of adding on a small fee to a transaction — in this context, to cover the merchant’s costs for credit card transactions. However, it is far from simple for merchants to begin adding surcharges to their transactions. In this guide, we’ll take a look at state laws and card association guidelines for surcharging, what you need to do if you want to start adding surcharges, and the limits on which cards you can apply surcharges to, how much you can charge, and how the practice could change in the future.
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Card Associations Allow Surcharging — But Not All States Do
Before you even look at card association guidelines for surcharges, you need to check the laws for the state(s) your business operates in. At the time of writing this, 10 states have bans on credit card surcharging, justified on the grounds that it’s unfair to consumers. Those 10 states are:
- New York
If your business operates in one of these states, it’s illegal to impose a surcharge. However, you can still offer a discount for customers who want to pay by cash or check instead. Some people argue that it’s a matter of semantics…. but we’ll come back to that particular point later. For now, the takeaway is that you can incentivize cash-paying customers with a discount, as opposed to discouraging card payments by adding a fee.
If your business operates in multiple states, you can still add a surcharge in states that allow the practice — just not in the ones with bans.
And then, of course, there’s the other limitation you need to consider: You cannot impose a surcharge on debit or prepaid cards, only credit. That’s because of the restrictions implemented by the Durbin Amendment of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Durbin Amendment specifically deals with debit transactions, including implementing a cap on interchange fees. (Worth noting: You won’t see those fees if your processor doesn’t support debit or if you are on a qualified/tiered pricing plan.)
Check out this infographic from CardFellow for a more visual breakdown of credit card surcharging.
Card Association Requirements for Surcharging
Once you’ve made sure that it’s legal for you to impose a surcharge, there’s still a bit of legwork and research to be done.
First of all, you need to take a look at which cards your business accepts, because that will affect your policies. Then, you’re going to need to provide your merchant acquirer and the relevant card networks that you intend to start providing a surcharge. You also need to make sure that your POS is adequately capable of recording the surcharges in your system.
Surcharging Requirements According to the Card Networks
Do you accept Visa? MasterCard? American Express? What about Discover? The card associations have each set their own guidelines for merchants who want to add surcharges — which means you should reach each of their requirements before you get started.
You’ll find out that the card associations are very, very firm on making sure that you, the merchant, do nothing to discourage customers from paying with their particular brand of card over the other options (save for cash, check, or EFT/debit). Fortunately, the overall guidelines for the networks are the same:
- There are limits on the surcharge amount.
- You must post appropriate notice inside your store.
- You need to include the surcharge amount on the receipt (as a separate line item), in the network authorization request, and in settlement. (Which means you need a POS capable of supporting this feature. Sorry, mPOS users.)
- You can choose to apply brand-level surcharges (all Visa cards, for example), or product-level surcharges (only certain lines of cards). However, you can’t do both.
- You must notify the card association as well as your acquirer/ISO (in other words, your merchant account provider), in writing, at least 30 days in advance.
What’s the Maximum Surcharge Allowed?
Visa and MasterCard’s guidelines are the baseline rule here. You can’t apply a fee larger than your discount rate (i.e., the swipe fees you pay to your processor), up to a maximum 4%. So if your swipe rate is above 4% (which it /really/ shouldn’t be except for a few select types of cards), you still can’t charge anything above that.
However, here’s where things get a bit frustrating for merchant: You can’t assess a higher surcharge for one card network than another. That’s specifically laid out in American Express’ merchant guidelines. Given that most AmEx swipe fees are higher than Visa or MasterCard, you’re still going to lose a little bit of money, because you can’t charge more for AmEx than Visa or MasterCard. Same goes for Discover.
What’s Considered Appropriate Notice?
If you plan to add surcharges, you need to post a notice at the entry to your store letting customers know that you add a surcharge to all credit transactions. You must also post a notice at your point of sale (your register). The notice must include the rate you charge as well as a comment that it doesn’t exceed your own processing fees.
What About Recording my Surcharges in my POS?
Your POS must be capable of including the surcharge as a line item, as well as reporting it back to your processor and card networks. That means you can’t assess a surcharge while using an mPOS system such as Square or PayPal Here. In fact, you’ll find their terms of agreement actually prohibit the practice.
So before you decide to implement a surcharge, you should check that your POS supports it. If not, time to go shopping. (Just make sure you do your price comparisons — don’t lose money on a POS just so that you can offset your card costs!)
What’s the Difference Between Product-Level and Brand-Level Surcharges?
This is where surcharging gets to be a bit tricky because of the guidelines about not favoring one network over the other. If you’re accepting American Express/Discover, you should just implement brand-level surcharges to protect yourself. If you’re only accepting Visa and MasterCard, you’ve got a bit more flexibility here.
Product-level surcharges apply to specific lines of cards. You can assess different surcharges for some products. After all, rewards cards and commercial cards do often cost more than your standard consumer card. However, you’ll need to meet Visa and MasterCard guidelines for product-level surcharging.
How Do I Notify my Acquirer/ISO and the Card Networks?
Your best bet is to reach out to your account representative for your merchant account and ask how they want to proceed. You’ll have to provide a written notice, so a phone call isn’t sufficient. But they’ll be able to tell you to whom you should direct that request.
Card Network Resources for Surcharging:
- Visa Surcharging FAQ
- Visa Small Business Resource Center: Regulations and Fees
- MasterCard Surcharging Rules
- American Express Merchant Reference Guide
- Discover Surcharge Website
What Does the Future of Surcharging Look Like?
The card payment industry does change over time. Slowly, sometimes, but it does change nonetheless. One interesting turn of events that is still playing out is the U.S. Supreme Court’s accepting a case from New York merchants trying to strike down the ban on surcharging.
The case has been fighting its way through the courts for a while now. Merchants contend that current regulations limit their free speech (instead of just their behavior) by forcing them to issue discounts for cash instead of stating that there’s a surcharge for credit cards. Given that this is the Supreme Court, the ruling could have consequences on all the other state bans. So you may want to pay attention to this case.
Final Thoughts: Should You Add a Credit Card Surcharge?
Assuming you’re in a state that allows surcharges, and you’re not using an mPOS, and you’re willing to put in the time and effort to make sure you are compliant with the guidelines, the question still remains: Should you add a surcharge?
It depends on your customers. Implementing the surcharge could, in fact, cost you customers (there’s no definite answer on that, unfortunately) — losing you more money than you’d save by offsetting credit cards. You’ll have to decide whether your customers are the kind who don’t mind paying the extra fee.
And if your POS doesn’t support the necessary features, you’ll have to shop for a new POS. Make sure that the cost doesn’t negate what you save by passing on credit card fees.
And here’s one final thought to consider: If your merchant fees are getting to be prohibitively high, it might be time to look for a new processor. If you’re on a tiered or qualified pricing plan, we encourage you to look for an interchange-plus option, which is more affordable and more transparent. Check out our top-rated merchant account providers to get started.
Have more questions about surcharging? Leave us a comment and we’ll do our best to help you get the answers you need!