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The Truth Behind Free Credit Card Processing

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Truth behind free credit card processing imageFree. 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” comes without a cost of some kind. 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 be paid back. Credit card associations, likewise, only make money by charging interchange fees whenever their cards are 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 allowing credit cards will bring, you have to accept 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 usually works out in your favor. Nonetheless, it is possible to transfer the cost of credit card processing onto your customers, at least in most states. This practice is called surcharging, although you’ll also hear it referred to as zero-fee processing or something similar.

How Surcharging Works:

Surcharging is simply the process of 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 first thing you need to know about surcharging is that it isn’t legal in all jurisdictions. Currently, 41 states allow surcharging in one form or another, although the requirements you’ll have to meet to do so vary from state to state. Nine states ban surcharging altogether. Here’s a list of the states where you can’t surcharge:

  • Colorado
  • Connecticut
  • Florida
  • Kansas
  • Maine
  • Massachusetts
  • New York
  • Oklahoma
  • Texas

If you’re based in one of those states, you won’t be able to surcharge at all. 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. California has also banned surcharging, but the statute was found to be unconstitutional in 2015 by a Federal court and is currently unenforceable.

Surcharging also applies only to credit card transactions. If a customer pays with a debit card, cash, or eCheck (ACH) payment, you cannot add a surcharge. You’ll have to have your credit card terminal (or POS system, virtual terminal, or payment gateway) set up to only apply surcharges to transactions where the customer is paying with a credit card. Any processor can do this for you, although most traditional merchant account providers don’t advertise the availability of surcharging. You’ll also have to provide notice to your customers that they’ll have to pay a surcharge for using their credit cards. Retailers can meet this requirement with signs and placards posted in their business, while eCommerce merchants will have to include this information on their website.

While you can surcharge with any processor, including your current provider, there are now a number of companies on the market that specialize in providing what they call “free” or “zero-fee” credit card processing. We’ll take a look at some of the more well-known zero-fee providers later in this article. To learn more about surcharging and the requirements for implementing it, please see our article Your Complete Guide to Credit Card Surcharges.

Legal Issues:

Surcharging hasn’t been around for very long. Back in 2005, a group of retailers filed a massive class-action lawsuit (called the Payment Card Interchange Fee and Merchant Discount Antitrust Litigation) against Visa and MasterCard, alleging that the credit card associations were charging unreasonably high interchange fees and preventing them from passing this cost onto consumers. A $7.25 billion settlement was reached in 2012 that lowered interchange fees and allowed surcharging. This settlement was originally approved by the Federal District Court judge, and this is when surcharging (and companies that specialize in setting it up) first appeared on the scene. However, the settlement was overturned in June 2016 by the United States Court of Appeals for the Second Circuit when it was challenged on appeal.

Since then, the case has been appealed again, this time to the United States Supreme Court. In March 2017, the Supreme Court declined to hear the case. As of this writing, the previous settlement is no longer valid and the case has been returned down to the District Court level, where the parties will either have to go to trial or attempt to reach another settlement.

While this may all seem very confusing (and it is), the bottom line here is that the practice of surcharging is on very shaky legal ground while this action continues to be litigated. A future court ruling could invalidate the practice altogether – leaving merchants to scramble to adjust how they pay for processing charges and probably forcing many of the processors who specialize in surcharging out of business. If you’re thinking about surcharging your customers, you’ll want to be aware of this legal cloud and keep a close eye on the progress of this lawsuit.

Advantages and Disadvantages of Surcharging:

Whether or not surcharging is here to stay, there are several issues you’ll want to consider before you decide to start using it. Here are some of the pros and cons you need to think about:

PROS:

  • Lower costs for your business: Obviously, the primary advantage of surcharging is that it saves you a significant amount of money, which should lead to higher profits. At the least, your customers will be paying your processing charges instead of you, saving you around 2.0-3.5% on each transaction. You may, of course, still need to pay any number of separate fees associated with maintaining your merchant account. These include monthly account fees, annual fees, PCI compliance fees, and others. However, some providers will allow you to pass these fees onto your customers as well by charging a slightly higher processing fee for each transaction.
  • It encourages your customers to use alternate payment methods: If customers know they’ll have to pay a surcharge to use their credit card, many of them will avoid paying extra by using cash, a debit card, or even a personal check. This benefits you as well, as the surcharge isn’t going to you anyway, and these other payment methods cost little or nothing to process.

CONS:

  • High probability of lost sales: It should go without saying that your customers are not going to be happy about having to pay a surcharge. Merchants have been paying processing charges for so long now that most consumers simply don’t understand that it costs extra to use a credit card. They’ve been shielded from this added expense, and no one likes to have to start paying for something that’s always been free in the past. A recent poll found that 65% of respondents would stop using their credit cards and rely on other payment methods if they had to pay a surcharge.
  • Surcharging doesn’t eliminate all your merchant account costs: As we’ve noted, you still might have to pay all the fees that inevitably come with having a merchant account. While you might be able to pass some of the fixed fees onto your customers, you’ll still be responsible for things like chargebacks, Address Verification Service (AVS) fees, and terminal lease fees. You also cannot charge a surcharge higher than 4.0%, which is less than the actual processing fee that some providers will charge you. In this case, you’ll have to make up the difference.
  • Legal issues regarding surcharging: As we’ve noted above, there’s currently a legal cloud hanging over the practice of surcharging. You should also consider the variations in state law regarding the practice. While only nine states have banned it outright, you can expect this number to grow if surcharging becomes more prevalent and consumers demand action from their state legislatures.
  • Competitive disadvantage: You need to know whether your competitors are surcharging before you consider adopting the practice. Obviously, there’s a good chance that you’ll lose at least some customers permanently if you surcharge and other competing businesses do not.

“Zero-Fee” Processing Providers:

With the credit card associations now allowing surcharging (at least for the moment, and only under certain circumstances), there are several processors joining the market that specialize in it. Of course, you can surcharge using your current merchant account provider, but these companies will take care of all the work setting up your account and equipment that you would otherwise have to do yourself.

Most of these businesses bill their services as “free credit card processing” or “zero-fee processing.” The word “surcharging” is hardly ever used. This practice, of course, is rather deceptive. They’re trying to make you think that you’re somehow getting around paying interchange fees, when in fact you’re actually just passing them on to your customers. Here are some short profiles of a few of the more prominent zero-fee processors:

ChargePass:

ChargePass logo

ChargePass is a small provider headquartered in New York City, New York. The company markets their service as “free” credit card processing. They support all major credit cards (including MasterCard, Visa, Discovery, and American Express). They also support NFC-based payment methods such as Apple Pay, and also offer EMV-compliant credit card terminals.

ChargePass does not disclose any of their processing rates or fees on their website. Billing is month-to-month, with no long-term contract and no early termination fee. You can look at their Terms and Conditions to read all the fine print that applies to their accounts. The company will set up your equipment to automatically apply a discount for cash payments. While account fees aren’t disclosed, they also offer a No-Fee Program. If you sign up for it, your customers will pay a higher processing rate, which is then applied to your monthly fees. Your other option is to pay the monthly fees yourself, which allows your customers to pay lower surcharges.

The company also offers a wireless credit card terminal, a “web portal” (actually a virtual terminal) that comes with a USB-connected magstripe reader, a mobile payments app, and a magstripe card reader for your smartphone or tablet. Unfortunately, their service doesn’t currently work with eCommerce platforms.

ChargePass requires that merchants have a minimum $10,000 per month processing volume to be approved for an account. While the company markets to retailers and professional services, it appears that many of their customers are taxi cabs and other transportation providers (i.e., buses and shuttle vans).

We couldn’t locate much feedback – positive or negative – about ChargePass. The company doesn’t even have a BBB profile. While the absence of complaints isn’t much of an endorsement, it’s at least a good indication that ChargePass isn’t a scam. One thing we noted on their website was that they imply that their service is available in all 50 states. As we’ve noted, surcharging is currently illegal in nine states.

Dynamic Payment Systems:

Dynamic Payment Systems logo

Dynamic Payment Systems is another “zero-fee” processing provider, located in Traverse City, Michigan. If your first impression of this company comes from their website, you probably won’t want to do business with them. It’s quite awful, with many spelling and grammar errors in almost every sentence on every page of the site. Nonetheless, they do disclose a little more information about their service than most of their competitors. They list every state where surcharging is not allowed, as well as other restrictions on how you can use their service.

The company can accept credit card payments from Visa, MasterCard, and Discover. They don’t allow debit cards or payments made using PayPal (this is because PayPal bans surcharging). They also support eCommerce and other card-not-present transactions. Dynamic Payment Systems offers a variety of credit card terminals, including the Verifone Vx520 and wireless Vx680 models. Unfortunately, it appears that terminals are only available through a lease, which you should absolutely avoid. The company also offers a virtual terminal and POS systems, which they will sell you outright.

Dynamic Payment Systems appears to rely heavily on independent sales agents to market their services, and includes a recruiting pitch for ISOs on their website. While this practice doesn’t seem to have generated any complaints, be aware that independent agents throughout the processing industry have a terrible reputation for misleading and unethical sales practices.

The company doesn’t disclose any pricing information on its website, but they appear to charge a flat 3.45% processing charge on each transaction. If you want the surcharge to go toward covering your monthly fees, the rate rises to 3.65% per transaction. These rates are notably higher than you’ll usually pay with a more traditional processor, and are probably indicative of the rates charged by other “zero-fee” processors. While you won’t be paying these rates yourself, they’re certainly not going to help in getting your customers to accept the idea of paying a surcharge for using their credit cards.

Unless you opt for the higher surcharge rate to cover your fees, you’ll have to pay $5.00 per month to maintain your account. You’ll also pay $6.99 per month for PCI compliance, and possibly equipment leasing fees as well. Not exactly “free,” is it?

Dynamic Payment Systems doesn’t appear to market to specific business types, and we couldn’t find any negative feedback about the company online. They don’t disclose the length of their contracts either, so watch out for a long-term contract with a possible early termination fee (ETF).

Shift Processing:

Shift Processing logo

Yet another “zero-fee” processing provider, Shift Processing offers both traditional and surcharged processing. The company uses Pivotal Payments as their backend processor, but appears to offer somewhat better terms overall. They do not charge an annual fee, and billing is month-to-month with no long-term contracts. They also claim to provide “free” equipment, but we’re very skeptical of this because it’s a common misleading claim in the processing industry. There’s almost always a cost attached to equipment supplied to you by your merchant account provider.

Shift Processing also advertises the availability of high-risk merchant accounts, but it’s not clear from their website whether surcharged processing is available for these merchants. The company offers a variety of credit card terminals, including models that support EMV and NFC-based payment methods. Pricing isn’t disclosed, so be very wary of inadvertently signing up for a terminal lease.

While their website has a nice, professional appearance, it mostly contains marketing fluff and provides very little concrete information. Pricing is not disclosed, and there’s no mention of pricing models. There are, of course, plenty of claims that they have the “lowest rates.” They probably don’t. This might not matter to you if you’re going to surcharge, but it could ultimately affect your bottom line if your customers decide that they’re paying too much to use their credit cards and take their business elsewhere.

The company appears to market to regional fast food chains, although they claim that their “zero-fee” pricing option will work for just about any type of business. Unlike the other surcharging specialists we’ve profiled in this article, Shift Processing has quite a few testimonials from verified clients on their website. The company doesn’t have a BBB profile, and we weren’t able to find any negative feedback about them online. While the absence of negative feedback can sometimes be a good sign – particularly for a larger company – we’re still suspicious given Shift Processing’s relatively small size.

Final Thoughts on “Zero-Fee” Processing:

From a merchant’s perspective, it makes perfect sense that the customer should bear the extra cost of using a credit card. Customers have a variety of payment methods to choose from, and if they choose one that ultimately costs more to use, then they should have to pay the extra expense involved with credit card processing. Unfortunately, that’s not how it works in the real world. Customers have been getting away with not paying extra to use credit cards for so long that it’s simply expected. Convincing the public that they should have to pay for something that’s previously always been free will be an uphill struggle.

Changes in preferred payment methods over the years make it even less likely that surcharging will ever gain widespread public acceptance. It wasn’t that long ago that most consumers carried a checkbook and a wallet full of cash with them wherever they went. That’s not the case today. Paying with cash has dropped off dramatically in recent years, and paper checks are almost a thing of the past. At the same time, the use of credit and debit cards has soared. Now that consumers can make NFC-based payments with their smartphones (and even watches), it’s even less likely that they’ll acquiesce to paying a surcharge or revert to more traditional payment methods.

Overall, we’re just not convinced that surcharging your customers is a good idea, and we doubt that it’s ever going to be a good idea. Unless your competitors are already surcharging, it’s most likely that you will lose a significant amount of sales if you start surcharging. You might come out ahead if the savings in processing fees outweigh the loss of business, but then again, you might lose more money than you save.

The legal uncertainty surrounding surcharging is another good reason to avoid it. We really won’t know until the class action against the credit card associations is finally decided whether surcharging is here to stay. Even if it is upheld, there’s still the possibility that more states will move to ban the practice due to an outcry from their voters.

We also weren’t very impressed with any of the providers we looked at that specialize in offering “zero-fee” processing. They all appear to be very small companies that have only been in business for a few years, and none of them seem to have established much of a reputation – good or bad – to back up their claims of being able to save you money. Inadequate pricing disclosures and frequent use of independent sales agents are further reasons to stay away.

There are, of course, always exceptions. Certain specific business types, where surcharging is already a common practice, might be able to surcharge without experiencing a loss of business. Taxi cabs and other transportation companies, for example, can often get away with surcharging due to the nature of the transaction. If you’ve just finished a cab ride and all you have to pay with is a credit card, you won’t have much choice but to pay the surcharge as well.

Our final recommendation for merchants considering surcharging is to use your regular processor – not one of the companies specializing in it. It will require a little more work on your end, but you’ll probably have lower processing rates to pass on to your customers and (hopefully) better customer service. You also won’t have to worry about switching providers.

Have you had any experience with any of the companies profiled in this article? Have you had any experience with surcharging in general? If you have, please tell us about it in the comments section below. Thanks!

Frank Kehl

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.
Frank Kehl
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10 Comments

Responses are not provided or commissioned by the vendor or bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by the vendor or bank advertiser. It is not the vendor or bank advertiser's responsibility to ensure all posts and/or questions are answered.

    Deni A Celley

    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. 😬

      Jessica Dinsmore

      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!

        Greg Narez

        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.

          Jessica Dinsmore

          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!

            Tod

            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?

              Jessica Dinsmore

              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.

                Mike Ryan

                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?

                  Frank Kehl

                  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.

                    Dujeluri

                    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

                      Jason Perry

                      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 🙂

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