Your Complete Guide To Credit Card Surcharges
It’s safe to say that merchant relations with credit card processing companies, card associations, and 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. Every so often, things reach a peak — for example, the massive class-action lawsuit that merchants filed against Visa and Mastercard, alleging that they were being charged excessively high fees and that guidelines kept them from adding a credit card surcharge or pointing customers at less expensive options.
After a decade of fighting in court, the merchants involved in the suit, along with the card networks, reached an expensive settlement — and more importantly, the lawsuit laid the groundwork for merchants to recoup some of the costs associated with credit card transactions. The card associations have changed their rules as a result of the lawsuit.
Surcharging is the practice of adding on a small fee to a transaction to cover the merchant’s costs for credit card transactions. It’s ultimately just asking the customer to pay for the convenience of being able to use their card.
However, despite the lawsuit and the revised rules from the card networks, it’s 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, several states have bans on credit card surcharging, justified on the grounds that it’s unfair to consumers. Others have had their bans challenged and overturned.
States that currently prohibit surcharging:
States where “No-Surcharge” laws have been found unconstitutional and are enjoined from being enforced:
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 this “cash discounting” is 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.
There’s one other limitation you need to consider, as well: You cannot impose a surcharge on debit or prepaid cards, only on credit cards. Even transactions processed using signature debit (often referred to as “running a card as credit”) are still debit and are therefore exempt from surcharging. 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 the implementation of a cap on interchange fees. (Worth noting: You won’t see those savings if your processor doesn’t support debit or if you are on a qualified/tiered pricing plan.)
Two states require additional disclosures to surcharge credit card processing fees: Maine and New York. In both cases, you must post both the cost of paying with cash and the cost of paying with a card, using dollars and cents. This is on top of the requirements of Visa, Mastercard, American Express, and Discover, which require you to post notifications at the point of sale and specify the amount of the surcharge.
In addition, it’s important to note that the limitations on surcharging generally only apply to consumer businesses. Separate laws and regulations affect the ability of government agencies and educational institutions to implement surcharges, and these are allowed even in states that prohibit surcharging by consumer businesses.
So how does all of this affect large businesses that have multiple locations? 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. You’ll want to verify that you’re compliant with each state’s laws on surcharging, as well.
Card Association Requirements for Surcharging
Once you’ve made sure that it’s legal for you to impose a surcharge in a given state, 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. Do you accept Visa and Mastercard? American Express? What about Discover? Each of these card brands has set its 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 other brands. (Note that this doesn’t apply to discouraging card use over cash, check, echeck/ACH, or debit.) Fortunately, the overall guidelines for the networks are mostly the same:
- You must notify the card association as well as your acquirer/ISO (in other words, your merchant account provider) of your intent, in writing, at least 30 days in advance. (Note: American Express surcharge rules do not require you to provide notice so long as you comply with all other rules.)
- Surcharge amounts are limited to your effective rate for credit card transactions, capped at 4%. In other words, you can’t profit from surchages; you can only recoup your baseline costs.
- You must post appropriate notice inside your store, both at the entrance and at the point of sale. Similar rules apply to ecommerce businesses at the checkout page of their websites.
- You need to include the surcharge amount on the receipt as a separate line item. The surcharge also needs to be included in the network authorization request and settlement. (Note: American Express is the only brand with an exception to this rule.)
- For Visa and MasterCard, 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.
Once you’ve read and understood the core rules that affect surcharging, there’s still more work to do. You need to notify your merchant acquirer and the relevant card networks that you intend to start providing a surcharge. Finally, you need to make sure that your POS is capable of recording the surcharges to comply with the card network requirements.
FAQs About Credit Card Surcharging
Now that we’ve covered the core rules, let’s take a closer look at some the common questions that come up with credit card surcharges, from how much you can actually charge to who you need to contact.
What Is The Maximum Surcharge Allowed?
The maximum surcharge amount allowed is 4% of the total transaction amount. However, merchants should be calculating their surcharge based on their effective rate — that is, the total amount of fees incurred for accepting credit cards, averaged out per transaction. The effective rate can be based on either the previous 12 months or the month prior. Your effective rate for Visa and Mastercard transactions should be more in the range of 2.5-3% depending on your processor’s markup and your volume. (If your effective rate is much higher or it exceeds the cap of 4%, it’s probably time to switch payment processors.)
However, here’s where things might get a bit frustrating for merchant: You can’t assess a higher surcharge for one card network than another. So even though American Express’s interchange rates for certain industries are higher than those of Visa or Mastercard, you have to assess the same surcharge for all cards.
Section 3.2 of American Express’s merchant guide, “treatment of the American Express brand,” says that merchants cannot “impose any restrictions, conditions, disadvantages, or fees when the Card is accepted that are not imposed equally on all Other Payment Products, except for electronic funds transfer, or cash and check,” among other rules.
That said, since the surcharge amount should be based on your effective rate, it should average out over time. Check out our article How Much Should You Pay For Credit Card Processing? to learn more about calculating your effective rate.
What Is Considered Appropriate Notice To Consumers?
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.
Visa’s website has a resource page for merchants who plan to surcharge their credit card transactions. That includes downloadable sample signage that business owners can post in both places. However, the sample signage is specific to Visa, and doesn’t mention any other card brands. Still, you can use the wording to create your own signage.
Note: The requirements for surcharging ecommerce transactions are very similar. While you can’t really post a notice at the entrance to your store, you must include the disclosure in the checkout process and the surcharge must be featured on the receipt.
How Can I Correctly Document Surcharges?
If you plan to implement surcharges, keep in mind that Visa, Mastercard, and Discover require your point of sale system to include the surcharge as a line item, as well as reporting it back to your processor and card networks. So before you decide to implement a surcharge, you should check that your existing processing setup supports it. If not, time to go shopping. (Just make sure you do your price comparisons — don’t lose money on a POS or credit card terminal just so that you can offset your card costs!) Whether you sell online or in person, your surcharge needs to be included on the receipt as well.
Square does allow for the practice of surcharging provided to follow other guidelines (including notifying Visa and Mastercard). However, because of the way Square’s system is set up, it deducts the processing fee from the total transaction (after tax, tip, and yes, the surcharge). That ultimately means you won’t be able to perfectly offset your Square fees with a surcharge — there will always be a slight difference that can’t be reconciled. Square specifically says in its help center page on surcharges that some merchants use a third-party calculator app to help them figure out the math.
What’s The Difference Between Product-Level & 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 & The Card Networks?
The best way to notify your processor of your intent to start surcharging is to reach out to the account representative for your merchant account and ask how they want to proceed. You have to provide written notice, so a phone call isn’t sufficient. But your account representative (or anyone working in the customer service department, if you don’t have a dedicated representative) should 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 Merchant Acceptance Page
Should You Add A Credit Card Surcharge?
Assuming you’re in a state that allows surcharges, 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, as well as your competitors. Implementing the surcharge could potentially cost you customers. This is especially true for ecommerce merchants or anyone competing directly with big box stores — if you sell the same kind of products readily available on marketplaces such as Amazon and eBay or from Walmart or Target, adding an extra charge might send customers in search of a better deal.
That said, if your product is unique, you have a strong customer following, or you have some sort of other unique value proposition, you’re less likely to feel the pressure to conform to the same practices. Some businesses do have success with the zero-free processing model. You just need to find a good, reputable company that can help you implement the necessary technology, either in your store or on your website.
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. Very small businesses might be better served with a flat-rate pricing option. Check out our top-rated merchant account providers to get started, or look at our article, Six Signs Your Small Business Needs To Switch Payment Processors, to confirm what you already suspect.
Have more questions about surcharging? Leave us a comment and we’ll do our best to help you get the answers you need!