Charging Credit Card Fees: Understanding the Legality and Best Practices

“Surcharge.” Sounds like a great name for a rapper with a flair for spitting verses in Ye Olde English. But as you probably know, a surcharge is actually an additional charge that businesses slap onto a transaction to cover the cost of processing credit cards. Charging credit card fees is a great way to avoid additional expenses for your business. But, there are regulations you must be considerate of. 

This article will review everything you need to know to better understand the legality and best practices for surcharging.

What are Credit Card Surcharges?

A credit card surcharge is when a business adds a small fee to a purchase when a customer pays for it with a credit card. They do this primarily to cover the cost of credit card processing fees, passing them on to the customer. Implementing these fees can also encourage customers to use other payment methods like debit, cash, or ACH, which are far less costly to the merchant.

A surcharge should not be confused with a convenience fee. Convenience fees are usually flat fees charged to cover the cost of running a specific type of charge—they are not specifically intended to cover credit card processing fees. For example, a business might charge a convenience fee of $5 to take payments over the phone because this helps defray the cost of the labor to take the call and run the payment.

There are different types of credit card surcharges. A brand-level surcharge is applied to all cards of a particular type, such as Visa, Mastercard, Amex, or Discover. A product-level surcharge is applied to specific types of cards within a brand, such as Amex Blue, Chase Ink, or Bank of America Cash Rewards.

There are fixed-rate surcharges and variable-rate surcharges. The fixed-rate surcharge is a percentage that won’t change no matter what type of card is used. The variable-rate surcharge fluctuates to match the credit card fees of the card the customers pay with.

Of course, the variable-rate charge will help the merchant cover their fees 100% of the time, while the fixed-rate surcharge will be a hit or miss. However, a variable-rate surcharge will certainly be less attractive to your customers.+

Are Your Credit Card Fees Too High?

Before you go any further, you should check to make sure you aren’t over paying to accept credit card payments. At ECS Payments, we offer a complimentary payment processing statement analysis to any merchant who contacts us. 

We would love to take a deep dive into your current rates and explore areas where we can find you savings. Contact us online with our contact form or email us at info@ecspayments.com to request your complementary analysis.

Legal Landscape of Charging Credit Card Fees

A 2017 Supreme Court Case (Expressions Hair Design v. Schneiderman) established that price controls preventing surcharges on credit card purchases may be an infringement on the First Amendment right of free speech. That is to say, merchants should have the right to set their own prices…including surcharges.

You might think this landmark case made surcharging legal at the federal level, forcing every state to allow its merchants the right of surcharging. However, the court case specifically related to a business in New York. While the court’s decision implies that at the “federal level” merchants should be allowed to surcharge, surcharging regulations vary from state to state.

Practically speaking, what this has meant is that if merchants want surcharging rules to change in their state, they’ll have to take the state to federal court. And they have. Another 2018 case in the 9th Circuit Court of Appeals (Italian Colors Restaurant v. Becerra) forced California to scrap its 1985 ban on surcharging…and nobody had to end up facedown in a plate of pasta fazool.

Surcharging is actually still totally prohibited in Connecticut, Massachusetts, and Puerto Rico. In all other states, merchants are permitted to surcharge. However, most states have rules and regulations that must be followed. There might be caps on surcharge rates or requirements for disclosing surcharges to customers.

It would require an exhaustive table to display merchant surcharge guidelines for each and every state. Your payment processor is a better resource for understanding credit card transaction fees and what you can do to cover them, legally. But state rules are also somewhat less important than the rules set by credit card networks.

Compliance Requirements for Charging Credit Card Fees

That’s because, largely speaking, card networks have tighter rules than state laws around surcharging. Card networks want and need to create as much uniformity as possible across the country. So even if your state has more lenient rules about surcharging than others, you’ll need to follow the surcharge best practices as outlined by Visa and Mastercard.

That’s because Visa, Mastercard (and Amex and Discover) are the companies that help you accept credit cards. They (and your credit card processor) set the rules around credit and debit card transactions. If you can’t follow their rules, they may eventually boot you from their network. That is to say, you’ll no longer be able to accept their brand of cards.

Mastercard, for instance, requires a few things from merchants: 30-day notification to Mastercard and the acquiring bank that surcharges will be issued. The business must post signage about the percentage amount of the surcharge in advance of a sale and the exact dollar amount of the surcharge on receipts. 

Visa has similar rules, and both Visa and Mastercard prohibit surcharges on debit cards. They both cap surcharging rates at 4%, and they both permit brand-level and product-level surcharges. As the list of exact requirements may contain some indecipherable legalese, it’s (as mentioned) best to let your payment processor guide you through setting up surcharges.

Book A Demo With ECS Payments

If you’re curious about how to set up surcharges contact ECS Payments via our contact form on our website or by email at info@ecspayments.com. We can book a demo to help you better understand the process and requirements for a successful program. 

Benefits and Risks of Charging Credit Card Fees

Now, let’s weigh the pros and cons of covering your payment processing fees with a surcharge. What made a small family-owned hair salon in New York take their grievance all the way to the Supreme Court of the United States? Or a family-owned Italian eatery taking their case to a federal court of appeals?

As you know, accepting credit card payments is not free. But at the same time, it’s necessary, as most consumers pay for purchases with plastic. Moreover, credit card purchases tend to be much higher than cash or even debit purchases, so that helps as well. But losing 2.5% or 3% of every single transaction adds up over time.

The most obvious benefit to issuing surcharges is that you’ll wipe out those losses. However, many customers do not like seeing a surcharge, so it could also cost you business. You might be “okay” with the fees on most cards but dislike certain cards that have higher fees (like Amex). The problem with applying surcharges only to certain card brands is that some customers will feel singled out.

You can’t make everybody happy. At the end of the day, you may decide that you want to surcharge your customers. Or maybe you can build these transaction amounts into your pricing. The problem with hiding the extra fee in your total transaction is that you’ll end up inflating your prices up to 4%, which could also look unappealing to customers. 

Though… a $25 plate of pasta at a nice restaurant…like Italian Colors Restaurant, mentioned above, with a 4% surcharge, only comes up to a $26 plate of pasta. To be honest, I don’t think your customers would really notice a $1 increase. But with time and inflation, those numbers may continue to increase until Italian looks completely unappetizing at all. And a home cooked meal might be the only option.

Best Practices for Charging Credit Card Fees

If you are going to surcharge, you’ll need to adhere to the merchant fee rules from card networks and your particular state. Two frontline resources in meeting this aspect of credit card fee compliance are your payment processor and your local chamber of commerce.

As mentioned, in most places, credit card fee laws mandate the posting of clear signage. Let’s set aside the legality of credit card fees for a moment and think about the bottom line: profit. You want to create a positive experience for your customers and drive repeat business.

Clear signage does not mean a hastily scribbled sign taped to your register. Create printed signage and display it by the register. If you’re a restaurant owner, put it on your menus. Make sure your POS system is set up to print the exact dollar amount on receipts. If you have an online payment portal, make sure the surcharge is stated there as well.

ECS Payments has helped many merchant clients navigate the legality and best practices of implementing surcharges. Best practices will vary based on your specific industry. Overall, the keyword is transparency.

How to Implement a Surcharge Program

Let’s talk about how to practically implement a surcharge program. The first thing you’ll want to do is discuss the idea with your payment processor. Then, reach out to your local chamber of commerce to see what rules and regulations surround surcharging in your state.

Next, you’ll need to contact the card networks of all the cards you accept. Mastercard and Visa alike will have forms you’ll need to provide at least 30 days prior to implementing a surcharge. The information they’ll ask for will include:

• merchant’s name
• address
• phone number
• email
• the number of locations that will be surcharging
• whether the surcharge will be applied at the brand or product level

Once you’ve obtained all requisite permissions from the card networks, you’ll need to post signage in your store and/or update websites to reflect your new fees. But you’ll also need the hardware and software to charge the fees and make sure the dollar amount of every fee is provided on customer receipts. ECS Payments can provide support and resources for seamless implementation of a surcharge policy in every state and Puerto Rico.

Alternatives to Credit Card Surcharges

Earlier we went over some of the pros and cons of surcharging customers. However, there are alternatives. One (mentioned earlier) is to change your pricing. But another is to incentivize purchases with other forms of payment, rather than “punishing” with a surcharge fee.

Cash discounts are a way to encourage customers to pay with cash rather than use a card. Cash discounts are also legal in all 50 states, according to the Durbin Amendment of the 2010 Dodd-Frank legislation. However, there’s an important distinction to note: you cannot offer cash discounts on debit card purchases; such discounts are construed as essentially hiding a credit card surcharge.

Cash discounts still have their cons. Keeping large amounts of cash on hand is not safe and can attract crime. But the alternative means more work taking it to the bank. There are other ways to recoup the losses from credit card surcharges, such as increasing your customer lifetime value (LTV).

The easiest way to improve customer LTV is to implement rewards programs. These programs incentivize repeat purchases. Well-performing loyalty programs can boost customer revenue by as much as 25%. If you can implement a successful rewards program, the increase in customer spend will surely outweigh the losses at the point of sale.

Conclusion

Surcharges are a way for business owners to recoup credit card processing fees. However, issuing surcharges is a decision that must be weighed carefully. If you do decide to issue surcharges, there are legal and regulatory requirements you must adhere to. You must also have the right software and hardware to issue the fees and print them on customer receipts. ECS payments has worked with merchants to weigh the pros and cons of surcharge programs and implement them.

Frequently Asked Questions About Charging Credit Card Fees