Surcharging can be a great way for stores to recover costs associated with accepting credit cards, but it’s often not well-understood by customers and can be confusing. Don’t implement surcharging without understanding what it is.
As a business owner, there are plenty of decisions that you have to make to run your business seamlessly. Among those decisions are whether to add a credit card surcharge to your customer’s purchases. Let’s cover everything you should know about surcharging, from its definition, to the laws that govern them. By the end of this article, you will be able to better understand if this is the right decision for your business.
What is a Surcharge?
Surcharge definition: the act of adding a small charge to credit card transactions to cover costs for processing the payment. Surcharging transfers the processing fee onto the customer.
Other names for surcharging” include “zero-fee” or “free” credit card processing. Another practice that some merchants follow is called cash discounting. This is when a customer receives a discount for paying with cash, check, or debit card. This discount is equal to the cost of the credit card processing that the merchant would have paid otherwise.
With surcharging, the merchant adds this processing fee to the advertised price of the product or service. Cash discounting will subtract the cost from the advertised price when a credit card isn’t used. It’s important to understand this difference between a cash discount and a surcharge. Cash discounting is legal in the U.S., however surcharge payments are prohibited in a few states and territories.
How does surcharging work?
Surcharging works by adding the payment processing fee established by the payment processor to the customer’s transaction. This happens at the time of checkout.
Surcharging is allowed in several different kinds of transactions: recurring payments, commercial payments, government services and healthcare.
Can you add a surcharge to your card transactions?
Depending on the state that your business operates in, you may not be able to charge a fee for using a credit card. Thus, you should check the laws in your state first before making the decision to add a surcharge to credit card purchases.
Understanding Surcharging Laws
Historically, surcharging was illegal for many decades. However a class action lawsuit in 2013 brought upon some changes and allowed merchants in many U.S. States to implement surcharges. Over the past several years, more states adopted pro-surcharging laws.
Connecticut, Massachusetts, and Puerto Rico are the only states and US territories that don’t allow surcharges as of mid-2021. You can still enact cash discounting practices in these areas as an alternative.
The following states have anti-surcharging laws, but they are not enforceable as a result of recent court decisions:
- California
- Kansas
- Maine
- Utah
- Texas
- Oklahoma
- New York
- Florida
Maine and New York require additional disclosures if you decide to charge your customers a credit card processing fee. It essenttially requires you post the cost of paying with a card and the cost of paying with cash, using dollars and cents. This is in addition to the requirements set out by Visa, MasterCard, American Express, and Discover
The Limitations of Credit Card Surcharging
In general, surcharges only apply to consumer businesses. Government agencies and educational institutions have different laws and regulations that affect their ability to implement surcharges. Even in states that allow consumer businesses to charge a fee, it could be banned for other types of organizations.
If you have a business that has multiple locations, you can add a surcharge in the states that allows surcharges. Check each state you have a location to ensure that the practice is allowed.
Credit Card Surcharge Rules for Card Brands
Determining whether surcharge payments are allowed in your state is the easy part. The real work begins when you start looking at the guidelines and policies laid out by the credit card networks.
First, look at the networks that your business accepts. Visa, MasterCard, American Express, and Discover are all credit card networks and each card brand has their own guidelines for surcharging.
You’ll need to meet these requirements to implement a credit card surcharge. An important note is that these card associations want to ensure that you’re not discouraging a customer from paying with a particular card brand over another.
Here are the general steps that you must take with each network your business accepts:
- Notify the card association and your merchant account provider– This must be done in writing, at least 30 days in advance.
- Surcharge can only be as much as your effective rate for credit card transactions – This is capped at 4% (Colorado caps it at 2%) to ensure you are not profiting from charging the fee.
- Post appropriate notices in your store – These advertisements must be posted at the entrance and point of sale.
- Surcharge must have a separate line item on the receipt – It must also be included with network authorization requests and settlements, unless the customer is using an American Express branded card.
- Can choose to apply brand-level or product-level surcharges – This is for Visa and MasterCard brands and only one of these surcharges can be used.
Visa
U.S. merchants can add a surcharge at the “brand level” to all Visa credit cards. Or alternatively, they can charge it at the “product level” which could be Visa Traditional, Visa Signature, and Visa Traditional Rewards. You cannot do both, however.
MasterCard
MasterCard has the same requirements on their “product level” versus “brand-level” cards. Merchants should visit www.mastercardmerchant.com to find instructions on how to notify MasterCard on their intentions to apply a surcharge.
American Express
If you are a U.S. merchant that accepts credit or charge cards American Express, your surcharging practices are subject to what’s the “level playing field” limitation. Basically what this means is that you must charge the fee on the competing network’s credit card in the same sales channel as it goes for American Express. Check out American Express’s Merchant page for all their specific policies and procedures.
Discover
Just like American Express, Discover also has a “level playing field” limitation. For example, if you plan to surcharge Discover credit cards from your face-to-face sales and also accept Visa/Mastercard, you will also have the same fee on those card brands. To find Discover’s policies on surcharging, visit their Global Network website to learn more.
How to Set Up Surcharge Processing
Here are the general steps you need to take for your business to start taking credit card surcharge payments:
- Give notice to your merchant processor and card networks your business accepts
- Provide notice to your customers so they are aware that a surcharge is added to credit card transactions
- Ensure you’re adding a line item on all credit card purchases that include a surcharge
Check with your merchant processor to ensure that you’re point of sale equipment is set up to add a surcharge on credit card transactions.
Notify your merchant account representative that
Check with your merchant account representative to ensure your point of sale equipment is set up to add a surcharge on credit card transactions. Your merchant processor will be able to help you determine whether or not the equipment can handle this feature.
Notify your merchant account representative that you will be surcharging credit cards. Your representative will need to notify the card brands your business accepts about your decision to surcharge cards.
Surcharge on credit cards can only be as much as a merchant’s effective rate for a transaction, which is capped at 4% in some states and 2% in Colorado. Post appropriate notices.
Notify your customers
Notify your customers you are surcharging credit cards. Customer notification before the transaction is required. Tell your customers that you will be charging them a surcharge on their purchase.
A surcharge must have a separate line item on the receipt for each credit card purchase. Each surcharge will need its own line item on receipts so customers know what they are paying and why.
Set up documentation to track your surcharges
You must track each surcharge you apply to credit card transactions. You can use software or software with additional hardware that can help you track your sales and surcharges.
Surcharging FAQs
Below are some commonly asked questions associated with surcharges:
Can I assess surcharge fees on debit cards?
The Durbin Amendment states that merchants can charge a surcharge equal up to the amount charged by the merchant’s bank to process the transaction. There is no limit to what your processor charges you for processing debit card transactions.
Do I have to disclose the surcharge information to my customers?
You are required to inform your customers that you will be surcharging their credit card purchase. You must post an appropriate notice that is clearly visible to the customer before they initiate the transaction.
How can I decide if I should assess a surcharge on card transactions?
You should consider surcharging card transactions if you want to recover the fee that your merchant service provider charges for processing cards. Customers will also tend to prefer cash as a form of payment if they know about the surcharge beforehand.
Can I choose which card brands I want to assess surcharge fees?
You cannot pick and choose which card brands to surcharge. You must surcharge all card types your merchant service provider accepts.
Final Thoughts
Many consumers are unaware of how surcharging works, and some consider it to be unethical. However, if you’re looking for a way to cover processing costs associated with credit card transactions without raising prices or cutting into your margins, then this might be the solution that’s right for you.
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