The Truth Behind Free Credit Card Processing — Can You Really Avoid All Those Fees?
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Free. Free as a bird. Free as in beer. Whatever saying you associate with the word “free,” the idea of getting something for nothing always has a special appeal. Of course, most of us have learned by now that almost nothing that’s advertised as being “free” truly comes without at least some cost. Whether it’s giving away your personal information to Facebook or just paying hidden fees on something that you thought was going to be free, there’s always a catch.
Credit card processing services are no different. Let’s face it: Every merchant is probably a little unhappy about the fact that they have to go through the hassle and expense of setting up a merchant account just so their customers can use credit cards. Having to pay the credit card processing charges every time a customer uses a card makes it even worse. In an ideal world, paying with a credit card wouldn’t be different (or costlier) than paying with cash. Unfortunately, in the real world, this is never going to happen. Issuing banks essentially have to loan customers the money to cover their credit card charges, and this inevitably involves the risk that they won’t get paid back. The only guaranteed revenue they make on credit card transactions comes from the interchange fees they charge whenever their cards get used. As it stands today, someone has to pay for credit card usage, and that someone is almost always you, the merchant.
Why is this so? The main reason is that customers don’t want to have to pay extra just for using their credit cards. If you want to benefit from the additional sales that accepting credit cards will bring, you have to acknowledge the trade-off of absorbing the cost of processing those transactions. With credit card usage soaring and customers increasingly not even carrying cash with them, this compromise can often work out in your favor. Nonetheless, it is possible to transfer the cost of credit card processing to your customers, at least under some circumstances.
In this article, we’ll discuss the various programs that are available to merchants that allow you to pass the cost of credit card processing to your customers. You’ll often hear the terms “surcharging,” “cash discounts,” and “zero-fee processing” used to describe these programs. However, they’re not all the same thing. Knowing the subtle differences between one program and another is critically important, as not all programs are legal in all jurisdictions. We’ll also explain how these programs work as well as discuss the requirements you’ll need to meet if you choose to implement one of them. Finally, we’ll provide a few recommendations for top-notch merchant services providers that can set you up with one of these programs and also show you how to tell if such a program is a good idea for your business in the first place.
 Learn More | Tired of credit card processing fees? Paymentcloud specializes in payment processing services where you pass the transaction fee on to the customer when they choose to pay with a credit card. |
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Learn More About Our Top Picks
| Company | Summary | Next StepsSummary |
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 | Best for high-risk and eCommerce businesses | Best for high-risk and eCommerce businesses
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 | Best for low-risk and brick-and-mortar businesses | Best for low-risk and brick-and-mortar businesses
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Read more below to learn why we chose these options.
Table of Contents
How Free Credit Card Processing Works
As we’ve explained above, “free” credit card processing essentially transfers some or all of the cost of accepting credit cards onto customers who choose to use that payment method. To get started, you’ll need to sign up for a free credit card processing program. While virtually any merchant services provider can set you up with this program, most will offer it through a third-party service provider.
Free credit card programs usually use software add-ons to allow your payment gateway, virtual terminal, countertop terminal, or point of sale (POS) system to detect when a credit card is used and automatically apply the appropriate charge to the purchase price. If you’re using a cash discount program, the same software can be used to apply the discount for customers using other payment methods. Note that such programs will usually only pass on processing fees for credit card transactions. All additional fees associated with maintaining a merchant account, such as account fees, PCI compliance fees, etc., are usually not covered. Additionally, there’s frequently a flat monthly fee that you’ll have to pay for the program itself. As usual, nothing in the credit card processing industry is truly free.
Cash Discounts VS Surcharges
Surcharging and cash discounts are simply methods for transferring the cost of credit card processing onto your customers in the form of an additional fee that’s added to their bill when they complete a transaction. The primary difference between these two methods boils down to when and how the additional charge is levied. With surcharging, the extra cost for credit card processing is added to the displayed price after the customer chooses to use their credit card to pay for a purchase. With this method, prices displayed in your store or on your website reflect the lower price for an item if payment is made in cash, by check, or using a debit card. Customers will get hit with the additional fee when they go to check out, although it shouldn’t be a complete surprise, as you are required to post adequate signage indicating that your business adds a surcharge for credit card purchases. For more details on the specifics of surcharging, please see our article, Your Complete Guide To Credit Card Surcharges.
With a cash discount program, the advertised price represents the price customers will pay if they use a credit card. In other words, the surcharge is added before the customer chooses a payment method. Customers using any other payment method will receive a discount when they check out. This will come as a much more pleasant surprise to your customers than getting hit with a surcharge, although these programs require the same type of adequate notice to customers as surcharging programs.
At this point, you might be thinking that while there ultimately is no difference in the final price paid by the customer under either program, cash discounting is going to be perceived much more favorably by customers than surcharging. After all, who wouldn’t be pleasantly surprised to find out that the total price for their purchase is going to be less than what they were expecting? State legislatures seem to agree, as cash discount programs are entirely legal in every state and territory in the United States (although signage requirements vary from one jurisdiction to another). Surcharging, on the other hand, is still illegal in some states, as we’ll see below.
Under either of the above programs, there are two significant limitations to keep in mind. First, surcharges can only be applied to purchases made with a credit card. All other payment methods are exempt, including debit card purchases. While processing rates for debit cards are very low, you’ll still have to absorb this cost just as you would if you weren’t using a surcharging program. Also, the surcharge (or discount for paying in cash) cannot exceed 4% of the total transaction. Depending on the rates charged by your merchant services provider, this may or may not be enough to cover processing costs in all cases. Purchases made with a rewards card, for example, carry higher interchange fees and may exceed 4% of the total in some cases. High-risk merchants, who typically pay significantly higher processing rates than their low-risk counterparts, will also likely be unable to cover the entire cost of processing some transactions due to this limitation.
To muddy the waters even further, there are also so-called convenience fee programs. Merchants using this type of program add a “convenience fee” at checkout but only to purchases made with a credit card. Unlike surcharging or cash discount programs, this fee is a fixed amount rather than a percentage of the total transaction. A customer will pay the same convenience fee for using a credit card, regardless of whether their purchase is for $10 or $1,000.
Deciding on how much to charge as a convenience fee can be an exercise in frustration. Naturally, you’ll want to charge enough to cover the processing costs for any transaction but without setting the fee too high and losing sales. Also, maximum limits on convenience fees vary from one jurisdiction to another, and every major credit card brand has its own unique rules about how much you can charge. You’ll have to contact your merchant services provider to sort it all out. For a great, in-depth discussion on convenience fees, please see our article, What Is A Convenience Fee?.
Legal Issues With Free Credit Card Processing
Unlike cash discount programs, surcharging is not legal in all jurisdictions. As of this writing, 44 states allow surcharging in one form or another, although the requirements you’ll have to meet to do so vary from state to state. Six states (and one territory) ban surcharging altogether. Here’s a list of the jurisdictions where you can’t surcharge:
- Colorado
- Connecticut
- Kansas
- Maine
- Massachusetts
- Oklahoma
- Puerto Rico
If you’re based in one of these states, you won’t be able to impose a surcharge on credit card purchases (although you can — confusingly — offer a cash discount). If you are located elsewhere but do business in one of the affected states, you won’t be able to surcharge any transactions originating from those jurisdictions.
The legal status of surcharging has changed dramatically in recent years, with many of the more important changes coming since this article was first published. As of early 2020, states such as California, Florida, New York, and Texas have seen their anti-surcharging statutes ruled unconstitutional in federal courts. While many of these laws are still on the books, they’re partially or entirely unenforceable due to these court decisions. We won’t attempt to cover the details here, as the current situation with surcharging is a convoluted mess that varies tremendously from one jurisdiction to another. We highly recommend that you consult with your merchant services provider (and possibly a provider specializing in zero-fee processing programs) for the specific rules that apply to your business.
When we first published this article, surcharging was on shaky legal ground, due to the assortment of conflicting legal opinions on the subject being issued in different jurisdictions around the country. Today, that situation is beginning to stabilize, and it appears that surcharging is here to stay. Payment processing experts throughout the industry expect that surcharging will soon become legal in all of the jurisdictions listed above, where it is still banned. However, the rules regarding how surcharging can be applied and what type of notice has to be provided to customers continue to be complicated and highly variable.
Today, the question for many business owners is no longer whether they can impose a surcharge but whether they should. As we’ll see below, the decision to implement a surcharging program isn’t as straightforward as you might think. While surcharging can definitely save you money on credit card processing, it can also alienate customers and result in lost sales. A lot will depend on whether or not your competitors are imposing surcharges.
Things To Consider When Looking For A Free Credit Card Processor
From a merchant’s perspective, surcharging to recoup the cost of processing a credit card transaction makes perfect sense. Why should you have to pay a significant amount of money whenever a customer decides to use a credit card? Credit card processing is expensive and can seriously cut into your profit margins. Of course, customers see it very differently. From their perspective, it shouldn’t cost extra to use one payment method instead of another. Many of them are already paying expensive annual fees just to have a credit card that offers lucrative incentives for its use. Most consumers are only vaguely aware that merchants have to shoulder the costs of credit card processing in the first place.
Until rather recently, surcharging wasn’t much of an issue. Most merchants quietly accepted the costs of credit card processing, knowing that doing so would lead to increased sales and higher overall profits. So what changed? In our view, the major factor that has led to the growing popularity of surcharging is the widespread use of rewards cards by consumers. Earning frequent flier miles and cash back rewards have been very popular with the general public, incentivizing consumers to prefer them over other payment methods. Naturally, someone has to pay for those perks, and it’s not the issuing banks that advertise them. Instead, merchants have had to subsidize these credit card perks through higher interchange fees. This, in turn, has led merchants to seek out ways to save money on their credit card processing, and passing these costs onto their customers is often the simplest and easiest way to do so.
If you’re seriously considering adopting a surcharging program to cut down on the costs you pay for accepting credit cards, be aware that it’s not for everyone. Here are the major pros and cons to consider before you commit to implementing a surcharging program in your business:
Pros
- Lower Credit Card Processing Costs: As we’ve already discussed, you will save money overall on your credit card processing costs by implementing surcharging. However, you won’t entirely eliminate those costs, so don’t be fooled by companies that market surcharging as “free credit card processing.” There are still a host of recurring and incidental fees that you’ll need to pay for a merchant account. You’ll also usually pay an additional monthly fee for adding a surcharging program to your account.
- Encourages Customers To Use Other Payment Methods: Yes, we’ve heard about how cash is dead, and how, in the near future, all payments will be digital. While current trends are moving in this direction, there are many reasons why “old-fashioned” payment methods will still be around for a long time. Older customers often still prefer paying in cash, while some customers might not have a bank account at all, let alone a credit card. Cash discount programs, in particular, offer a positive incentive for consumers to save some money by using a method other than their credit card to make a purchase.
Cons
- Surcharging Programs Are Not Truly “Free”: As we’ve mentioned above, you’ll still need a merchant account to accept credit cards. While a surcharging program can shift the cost of processing transactions onto your customers, there are many other fees that you’ll still have to pay. You’ll want to evaluate your anticipated costs very carefully to ensure that you won’t end up losing money by surcharging. These programs work best for businesses that have a steady, high volume of credit card transactions every month. If you only take credit cards occasionally or have a very low volume, surcharging may not be for you.
- Notice Requirements & Signage: You can’t have a surcharging program without providing adequate notice to your customers that they’ll have to pay extra for using their credit cards. Meeting these requirements will entail some cost and effort on your part, although your merchant account provider can usually help you.
- Lost Sales: Obviously, the worst potential downside to surcharging is that your customers will walk out of your store or abandon your website without making a purchase when they realize that it will cost them extra to use their credit cards. You’ll want to take a close look at what your competitors are doing before signing up for a surcharging program. If they aren’t surcharging, you could put yourself at a competitive disadvantage that ultimately costs you more money in lost sales than what you save through surcharging. Surcharging is customary and accepted practice in some industries (taxi cabs, for example) but practically unheard of in others.
The Best Credit Card Processors With Zero-Fee Programs
You can implement a surcharging program with any merchant services provider, including your current one (if you have one). However, there are also now a number of companies on the market that specialize in providing what they call “free” or “zero-fee” credit card processing. Unfortunately, the overall quality of service with these surcharging specialists is highly variable. While some are quite good (and often used by traditional merchant account providers to offer surcharging programs to their merchants), others only offer the same high fees, long-term contracts, and poor customer service that plague the rest of the processing industry.
Here are brief profiles of two traditional merchant account providers that offer surcharging programs. One, PaymentCloud, is a great choice for high-risk businesses. For low-risk merchants, National Processing is a great company for all-around high-quality merchant services.
1. PaymentCloud
PaymentCloud
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Surcharging programs can be an effective way for low-risk merchants to save money on credit card processing costs, but high-risk merchants have even more incentive to use them. Businesses in the high-risk category almost always have to pay significantly higher processing rates than low-risk companies. It’s not unusual for a high-risk business to pay rates that are twice as high as what a comparable low-risk business would pay. Passing on these rates to your customers, therefore, can save you a significant amount of money and make a big difference in your cash flow. However, remember that you’re not allowed to charge more than 4% as a surcharge, so some high-risk businesses won’t be able to recoup the entire cost of accepting a credit card transaction. It will, however, bring these costs down to a much more reasonable level.
One of the best high-risk merchant account providers that we’ve found, PaymentCloud (see our review), offers its surcharging programs for merchants in states where the practice is allowed. PaymentCloud can help you with the necessary signage and reprogram your equipment to automatically apply the surcharge whenever a credit card gets used for payment.
Unlike many high-risk providers, PaymentCloud doesn’t charge an application fee when you first set up your account. Contract terms and processing rates are all highly variable, so you’ll have to contact the company and obtain a quote for your business to see what kind of deal the company can offer you.
The company also has a great reputation among its merchants for top-notch customer service and technical support — a rarity in the credit card processing industry. Its complaint volume is extremely low, which is another good sign that merchants are satisfied with the service they’re receiving.
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2. National Processing
National Processing
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For small and medium-sized businesses that fall in the low-risk category, National Processing (see our review) is one of the best merchant services providers in the industry. It offers secure, stable, full-service merchant accounts with interchange-plus pricing as a standard feature.
If you already have your own processing equipment or are willing to buy it, National Processing will set you up with a month-to-month contract that doesn’t come with an expensive early termination fee (ETF). However, if you want to take advantage of its free credit card terminal offer, you’ll have to accept a standard long-term contract. Even then, National Processing is much more flexible about waiving the ETF under certain circumstances than most providers.
Like most providers, processing rates and account fees vary widely from one business to the next, so there are very few disclosures on National Processing’s website. You’ll have to contact the company to obtain a quote for your business and compare it to similar offers from competitors. Likewise, National Processing offers surcharging programs but doesn’t advertise them very heavily. You’ll need to discuss this with your sales representative if you’re interested in trying out this feature.
High-quality customer support is the secret ingredient that distinguishes the really good providers from the mediocre ones, and it’s not easy to find a provider that excels in this area. Fortunately, National Processing has a first-rate reputation among merchants for providing great customer support. You can expect that the customer service reps will take good care of your needs for as long as you maintain your account — not just during the sales process when they’re trying to convince you to sign up with them.
Get Started with National Processing
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Is Free Credit Card Processing Actually Worth It?
Whether you call it “zero-fee processing,” “free processing,” or simply “surcharging,” the practice of charging customers extra to cover the cost of credit card processing is gaining steam. While it’s never going to be popular with your customers, more and more merchants are adopting the practice as the legal barriers against it have fallen in recent years.
If you’re tempted to implement a surcharging program in your business, the main question to ask yourself is whether such a program will have a net positive effect on your cash flow. You’ll want to balance the savings in credit card processing fees against the potential for lost sales and alienating your customers. Certainly, you won’t want to continue a surcharge program if the volume of lost sales exceeds any savings in processing costs. Unfortunately, the only way to know for sure whether a surcharging program will be effective for your business is to try it out for a while and see what happens.
As we’ve alluded to above, the effectiveness of surcharging programs varies widely from one industry to another. Major retailers such as Amazon and Walmart don’t use surcharging. If you’re in the unfortunate position of having to compete against these companies (or the sellers that use their marketplaces), you’ll want to stay far away from surcharging. On the other hand, if your business specializes in selling niche products that aren’t available from the major big-box stores, you might be able to benefit from surcharging without losing a significant number of sales. As always, it’s critically important to watch the behavior of your competitors before you start charging your customers extra for using their credit cards. If the majority of your direct competitors already use surcharging, then you shouldn’t have any problems with implementing this option. On the other hand, if none of your competitors use surcharging, you probably don’t want to be the first business in your industry to try it.
If you’ve decided that a surcharging program might be a good idea for your business, we recommend that you implement a cash discount program rather than charging credit card users extra. While the net effect of either program is identical, cash discounting programs don’t have the legal complications of surcharging, and they’re more palatable for your customers.
We also recommend that you approach your current merchant services provider for help if you want to start surcharging. Any provider can set you up with surcharging, so going through your current provider will make the process as smooth and painless as possible. This recommendation assumes that you’re happy with your current provider, of course. (If not, maybe it’s time to switch processors.)
The growing popularity of surcharging programs has led to the formation of many new providers that advertise surcharging as their main feature. Don’t be fooled into signing up with one of these companies just because they offer surcharging programs. We’ve found that many of these providers, in addition to offering “free” credit card processing, also employ many of the same shady practices that have given the traditional credit card processing industry a bad reputation. Long-term contracts, early termination fees, expensive equipment leases, and poor customer service are all waiting for you if you don’t do your homework in evaluating a potential provider before signing up with one.
One segment of the market where surcharging is going to be more palatable to customers is if you’re running a nonprofit organization. If this is you, then you’re already well aware that, yes, nonprofits have to pay for credit card processing, too. While some of the better merchant services providers offer significantly discounted rates to nonprofits, it’s still an expensive proposition for an organization that’s trying to run on a shoestring budget. Your donors will be much more understanding about being charged a surcharge when they learn that it allows more of their money to go to whatever cause your charity is supporting.
Have you had any experience with either of the companies profiled in this article? Have you had any experience with surcharging or cash discount programs in general? If so, please tell us about it in the Comments section below. Thanks!
Looking for an affordable payment processor without necessarily adding a surcharge program? Check out our list of the cheapest credit card processors instead!
Learn More | Tired of credit card processing fees? Paymentcloud specializes in payment processing services where you pass the transaction fee on to the customer when they choose to pay with a credit card. |
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In Summary: The Best Credit Card Processors With Zero-Fee Programs
- PaymentCloud: Best for high-risk and eCommerce businesses
- National Processing: Best for low-risk and brick-and-mortar businesses
Frank Kehl
Frank Kehl has been writing about merchant services, payment gateways, and international money transfer services since 2015. He has a Bachelor of Science degree from Penn State and a Juris Doctorate from the Ventura College of Law. After a long and enjoyable career of traveling around the world as an Air Force navigator, he’s comfortably settled down in the wine country town of Paso Robles in California’s scenic Central Coast region. He enjoys reading, photography, hiking, and numerous other outdoor pursuits.
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Great article ! I’ve been selling SLICE zero fee processing for a few months. . Your article says Maine does not allow surcharging is that still the case?
This comment refers to an earlier version of this post and may be outdated.
Hi Damion,
According to the SLICE website, Maine still prohibits surcharges:
This comment refers to an earlier version of this post and may be outdated.
How are you liking slice? I’m thinking about joining.
This comment refers to an earlier version of this post and may be outdated.
Is Slice working out for you, I’m just trying to find out if they are really as good as I was told. Please let me know, thanks !
This comment refers to an earlier version of this post and may be outdated.
I was wondering if you’ve ever heard of ReversePOS and Virtual Merchant Solutions? I’ve signed up as a rep but getting worried, especially after reading this. 😬
This comment refers to an earlier version of this post and may be outdated.
Hi Deni,
Unfortunately we haven’t yet reviewed either one of those providers, so we can’t confidently give an assessment one way or another. But we wish you the best in your decision!
This comment refers to an earlier version of this post and may be outdated.
I also just signed with reverse pos. How has your experience been so far, Deni? Articles like this have got me worried, too.
This comment refers to an earlier version of this post and may be outdated.
The local bar in Illinois just started these surcharges. (4%) My question is, they ad the surcharge, instead of advertising a cash discount. The receipt says cash price and cc price. But the menus are supposedly the cash price. I though they were suppose to advertise the regular price with 4% added, then give you a 4% discount. They also charge this fee on debit cards. The Company set this up for them is KrullStone Partners LLC (251) 270-7173 Do you know which system they sell? With all the litigation going on, hard to tell what is legal. Doesn’t your merchant agreement prevail since the legal aspect is in limbo? Or are they operating from the consent agreement, not to charge debit cards a fee, and/or over 4% or actual cost which ever is less etc.
This comment refers to an earlier version of this post and may be outdated.
Hi Greg,
Thanks for writing! Merchants in Illinois are generally allowed to add surcharges of up to 4% for credit card purchases. However, there are a lot of caveats and procedures they have to follow. I’d recommend consulting with an Illinois attorney for the latest legal requirements. A merchant agreement would never take precedence over the law, even if it is a little unsettled. While the legal basis for surcharging appears to be solidifying in favor of allowing the practice, we still don’t recommend it for most merchants due to the potential for lost sales from customers who don’t want to pay extra just to use their credit cards. I hope that helps answer your query!
This comment refers to an earlier version of this post and may be outdated.
What is the law regarding signage?
How big is the sign , where is it placed, do you have to point it out, do you have to verbalize the text of the signage?
This comment refers to an earlier version of this post and may be outdated.
Hi Tod,
The legal requirements for signage are going to vary by jurisdiction, so you’ll have to either look up the law for your state online or consult an attorney for specific requirements.
This comment refers to an earlier version of this post and may be outdated.
Very informative thanks! Any updates forthcoming? We heard that in NY State it’s legal now. We also heard it’s for credit cards only not debit cards. Any info on that?
This comment refers to an earlier version of this post and may be outdated.
Mike;
New York’s state law banning surcharging is still on the books, but it took a serious blow at the US Supreme Court last year. That decision and other, more recent ones from several Courts of Appeal suggest that anti-surcharging laws are probably going to be barred on constitutional grounds sometime in the near future. We’ll update the article when the issue is settled. While a decision on anti-surcharging laws affects both credit and debit cards, the fees for processing debit transactions are usually so low that they’re treated the same as paying with checks or cash. I expect that even if these laws are eventually thrown out, most merchants will choose to “adjust” their prices rather than impose a surcharge on their customers directly.
This comment refers to an earlier version of this post and may be outdated.
Raising your prices just raises your processing fees leaving a gap between the “increase” from sales and the actual fee which would still be paid by the merchant . Raising prices doesn’t seem to be a great solution…rather just more fees
This comment refers to an earlier version of this post and may be outdated.
Dujeluri, how right you are. Not to mention that with ‘price adjustment’, my customers all pay the same amount whether cash, credit or debit, which penalizes my cash customers. They will have to ‘share’ the cost of my credit card customers. I like CardX’s ZeroCost solution but I never see a review for them. It’s almost as if Merchant Maverick is ‘in bed’ with it’s reviewees/partners. I’m not too sure on the validity of the reviews when the company who went before the US Supreme court on behalf of merchants everywhere is not even mentioned. Hmmm, I will keep checking. P.S. It’s okay to have a credit card fee in Florida too, FYI 🙂
This comment refers to an earlier version of this post and may be outdated.
Just a question on how surcharging and cash discount differ? I mean it sounds like it is splitting hairs legally, but in theory a state would allow cash discounting, which would get around surcharging, yes?
This comment refers to an earlier version of this post and may be outdated.