Passing on Credit Card Fees to Customers: A Guide to Surcharge Laws

In this guide to surcharge laws, we delve into the legal considerations businesses should understand before implementing a surcharge program. We’ll cover what a surcharge is, how it differs from a convenience fee, and best practices for legal compliance. By understanding the intricacies of surcharge laws, business owners can make informed decisions regarding how to pass on credit card fees to customers while maintaining adherence to the relevant regulations.

What Is a Surcharge?

A surcharge is an additional fee added to the regular price of a product or service, typically covering specific processing costs. While surcharges are found in various industries, their most common application is in payment processing, especially during credit card transactions.

In the context of credit card transactions, a surcharge is an extra fee that merchants might apply to the total purchase amount when a customer uses a credit card. This fee is intended to help lower the overall costs incurred for processing the credit card payment, as credit card companies often charge merchants a processing fee for each transaction.

What Is a Convenience Fee?

A convenience fee is a fixed charge that merchants can impose on customers, primarily to cover the cost of providing a more convenient payment option. Unlike a surcharge, which applies primarily to credit card transactions, a convenience fee applies to many types of transactions, both online and offline.

Convenience fees can either be a fixed dollar amount or a percentage of the transaction, often ranging from 2% to 3%.^[1]Stripe. “Credit Card Surcharges“. Accessed on August 10, 2023. However, merchants should fully disclose these fees to consumers before processing a payment.

Convenience Fee Vs. Surcharge: What’s the Difference?

Both convenience fees and surcharges are additional charges merchants might apply to transactions. However, they serve different purposes.

A convenience fee is an extra charge to offset the cost of offering a more convenient payment method, and it’s predominantly seen in online transactions or ticketing services. On the other hand, a surcharge is an additional fee that merchants add to the regular price of a product. It isn’t about providing convenience; rather, it’s usually added by businesses to cover extra costs in specific scenarios.

Essentially, a convenience fee covers the cost of added convenience, but a surcharge compensates for additional expenses the business incurs.

Is It Legal to Charge a Credit Card Fee to Customers?

The surcharge legality hinges on the specific laws of the region where the transaction occurs. Different countries, and even states within countries, have distinct rules about these fees. In the United States, for instance, credit card surcharges are subject to state-level regulation. Currently, most states allow businesses to add these fees with certain restrictions and requirements in place.

However, even in locations where surcharges are permissible, businesses often encounter restrictions and guidelines to which they must adhere. They might need to transparently inform customers about the fee before finalizing a transaction. Additionally, the fee shouldn’t surpass the actual cost incurred by the business for processing the credit card payment.

Credit Card Surcharge Laws by State

To ensure full compliance with the relevant laws on credit card fees, it’s essential to consult the specific laws of the state involved. Businesses operating within the following jurisdictions—Connecticut, Massachusetts, and Puerto Rico—must abstain from imposing surcharges, as of the date of this publication.

Are Debit Card Surcharges Legal?

No, merchants can’t impose surcharges on prepaid cards or debit cards. Even transactions processed as signature debit, also known as running a card as credit, fall under the debit category and are exempt from surcharges. This distinction arises due to the restrictions outlined in the Durbin Amendment of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Durbin Amendment specifically addresses debit transactions, but it also includes the establishment of a cap on credit card interchange fees.

Why Do Businesses Utilize Surcharging?

The major incentive for implementing a surcharge program is the ability to offset credit card processing fees, which are part of the broader spectrum of merchant account fees. By passing a portion of these fees onto the customer, surcharging helps mitigate the expenses associated with accepting credit card payments.

Surcharging also contributes to pricing transparency. This is because it clearly indicates the costs related to credit card transactions, enabling customers to make informed decisions about their preferred payment method.

Credit Card Surcharge Rules & Requirements

Since we now understand what a surcharge is, it’s time to look at the rules and requirements surrounding surcharges. However, keep in mind that rules and requirements can vary depending on the state.

Merchants have the authority to employ either a brand-level surcharge or a product-level surcharge on transactions involving credit cards. A brand-level surcharge involves uniformly applying a percentage fee on all credit card brands. When a merchant applies a brand-level surcharge, they’re adding an extra fee to every transaction made with that brand of credit card, whether it’s Visa, Mastercard, Discover, or American Express.

In contrast, a product-level surcharge is more selective. Instead of charging an extra fee for every credit card transaction, the merchant might add the surcharge only for certain types of those cards. For example, they might add a surcharge for a Visa Platinum card but not for a Visa Classic card.

Effective April 15, 2023, Visa revised its policy regarding the cap on credit card surcharges, dropping from 4% to 3%. It’s paramount for merchants and consumers alike to stay informed of ever-evolving card network rules and state regulations.

Transparent disclosure of surcharging practices is mandatory for merchants at the point of sale, including presenting the surcharge percentage and the corresponding dollar amount on the transaction receipt. Consult the specific rule governing consumer disclosure obligations for further details and requirements.

Two states, Maine and New York, require additional disclosures for surcharging credit card processing fees. You must display both the cash payment cost and the card payment cost in dollars, in addition to existing requirements set by Visa, Mastercard, American Express, and Discover.

To initiate the process of surcharging, first contact the merchant services provider responsible for your merchant account. Your account representative or a customer service representative should be able to guide you to the appropriate recipient for your surcharging request.

Card networks mandate that the point-of-sale system must incorporate the surcharge as a line item. However, they don’t impose strict rules on the wording for adding a credit card fee on the invoice.

Best Practices for Implementing Credit Card Surcharging

Before implementing surcharges, you should research the payment methods you want to use and learn how surcharging may promote or hinder overall growth. This knowledge will help determine an appropriate surcharge rate that effectively covers costs without overly burdening your customers.

Because surcharging regulations can be complex, many businesses adopt a strategy known as cash discounting to counterbalance processing costs. In cash discounting, merchants set the credit card rate as the standard and offer discounts to those paying with cash or debit. This isn’t technically a surcharge. Instead, it incentivizes cash and debit payments.

Should You Pass Credit Card Fees to Customers?

While surcharges are found in various sectors, they’re predominantly associated with credit card transactions. And it’s essential to differentiate between surcharges and convenience fees and to be aware of the legalities and regulations concerning their use. For businesses keen on mitigating credit card processing expenses, consider PaymentCloud’s zero-cost credit card processing solution! It can be a game-changer for credit card processing costs, and you’ll also benefit from a dedicated account manager’s guidance regarding compliance with surcharge rules and regulations.

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