Can Businesses Charge a Fee for Paying With a Credit Card? Here’s What You Need to Know

Can Businesses Charge a Fee for Paying With a Credit Card? Here’s What You Need to Know

As we move towards a cashless economy, with 79% of consumers having at least one credit card, the subject of fees charged by payment processors becomes more topical.

Card issuing banks and merchant service providers charge a merchant fee anytime you process credit card payments from customers, and these fees can add up pretty quickly. Business owners are, therefore, always looking for ways to reduce their credit card processing fees. To that end, some want to pass these costs on to customers.

Credit card surcharges and convenience fees are two common ways in which businesses charge customers when they pay with a credit card. In this article, you will discover how surcharges and convenience fees are imposed, if they are legal, and how you can implement surcharging.

What is a credit card surcharge?

A credit card surcharge is a fee that a business adds to any credit card transaction whether in person, by phone, or online. When a business charges such a fee, it is often small, and it helps merchants pass the expense along to customers to cover the cost of credit card processing fees.

If you choose to impose surcharges in the US, you are required to follow certain protocols and state regulations. You must notify the appropriate credit card associations before imposing fees, and your credit card surcharge must not exceed the cost of accepting the card or four percent of the total transaction.

You must also decide whether to add credit card surcharges at the brand or product level. You can’t do both. At the brand level, you will be adding the surcharge to all credit card payments from the same network, such as Mastercard or Visa.

At the product level, you will add the surcharge to all credit card transactions involving a particular type of credit card from that brand. For example, you may add a 2% surcharge to all credit card payments involving Visa Signature and 2.5% to all transactions involving World Elite Mastercard.

Not all merchants choose to impose fees on their customers for payment processing. You can refuse to accept credit cards to reduce processing fees (even though it isn’t quite practical to do so) or decide not to accept cards that charge higher processing fees like Discover and American Express.

Credit card surcharges vs convenience fees

It’s important that you understand the difference between a surcharge and a convenience fee since they are often wrongly used interchangeably. 

A surcharge is imposed only when a customer uses a credit card. It is regulated by state law, and the fee is limited to the amount the business is paying to accept the card. 

On the other hand, a convenience fee is imposed when a customer uses a payment method that is not customary for the business. For example, retailers that traditionally accept all credit card payments in-person can choose to impose a convenience fee for online credit card payments

Convenience fees are legal in all 50 states. But you can impose the fee only when you have another preferred form of payment as an option, and you must clearly communicate the existence of such a fee at the point of sale.

A credit card convenience fee has the same effect as a surcharge since it also helps a business cover processing costs. Your convenience fee must also not exceed the processing amount.

The convenience fees you charge will vary from one credit card network to another. Here are the convenience fee policies of the four major credit card networks:

Credit Card NetworkRules
VisaYou can charge convenience fees on all non-standard payments, except on the payment of income taxes in some states.
Mastercard Only government agencies and educational institutions can impose convenience fees.
American ExpressOnly rental companies, utility companies, educational institutions, and government agencies can impose fees.
Discover You are not allowed to charge convenience fees on Discover credit cards unless you charge the same fees on credit cards from other networks.

What is cash discounting?

Cash discounting is another way businesses pass the cost of credit card processing onto customers. Cash discounting involves giving a customer a discount equivalent to the cost of credit card transaction fees when the customer pays in cash, paper check, or debit card.

The primary advantage of cash discounting is that it’s legal everywhere in the US, unlike surcharging.

Are surcharges legal?

The result of a 2013 class-action lawsuit against Mastercard and Visa affirmed that businesses are allowed to charge their customers checkout fees to reduce the impact of credit card processing costs.

However, businesses must follow a number of rules when imposing surcharges, and not all states permit credit card surcharges. Eight states including Maine, California, Florida, Kansas, New York, Oklahoma, Colorado, and Texas still have anti-surcharging laws on the books which are unenforceable due to recent court rulings. However, surcharges are still illegal in Connecticut, Massachusetts, and Puerto Rico as of mid-2021.

Fortunately, surcharges are allowed in other states, and they have no prohibitions on convenience fees and no statutes on discounts for different payment methods.

How to get started with surcharging

All you need to take the leap is to add an amount that is not higher than the cost of credit card processing to the advertised price of your products. However, there are certain rules you must comply with to avoid being terminated by your card brand or fined. For example,

  • You must ascertain if your state permits checkout fees
  • You must send a written notice (at least 30 days prior) of your intention to levy a checkout fee to your credit card network and the relevant credit card association
  • You are not allowed to add a fee for debit card transactions 
  • You must place a “‘notice” on both the point of entry to your business and the point of sale informing customers about the existence of a convenience fee or surcharge
  • You must process the payment made with the credit card together with the surcharge as a single transaction
  • The surcharge must appear as a separate line item on the receipt 
  • The checkout fee must not be more than 4% of the total transaction

You should also get in touch with credit card networks to familiarize yourself with a provider’s rules on how and when to apply convenience and surcharge fees. For example, Visa prohibits setting a percentage for convenience fees, and you can only charge a flat fee on all transactions.

What are the minimum purchase amounts?

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 allows merchants to impose a minimum purchase amount on credit card transactions. This is set at $10 – the maximum amount allowed by law.

Setting a minimum purchase amount helps you ensure you can offset the interchange fee or processing fee to be paid to your credit card network.

Should you charge a fee for credit card transactions?

If you have ascertained that your state permits surcharges and convenience fees, and you have familiarized yourself with the relevant rules and regulations, you must also decide if imposing fees will be beneficial to your business. To do this, ask yourself the following questions:

1. Will imposing fees drive customers away?

You need to determine if your customers will be willing to pay an additional fee on the nominal prices of your goods and services for all credit card transactions. This is particularly important where other competing businesses are not imposing similar fees. If that’s the case, your customer may turn to your competitors.

2. Are you better off incentivizing customers with cash discounts?

When you have a customer base that’s willing to pay in cash, you can avoid alienating your customers with checkout fees. Offer discounts to customers who pay in cash instead of paying with their credit card. The discount should be the same as the surcharge added to the advertised price of your goods and services.

3. How will you notify customers about your new policy?

If you decide to take the plunge and impose a surcharge or convenience fee for every credit card transaction, you’ll need to determine the best way to notify customers without damaging your existing customer relationships. You can send them a notice explaining why you are making the change or you can just let them discover it by themselves when they see the notice at your store or when informed during credit card purchases.

4. Are you better off switching to a different credit card processing company instead of charging extra fees?

Instead of imposing extra fees on your customers, you may be better off looking for alternative credit card processors like Payment Depot that offer pricing with no markups and membership-based wholesale rates that let you save more as you process more payments. You can also consider negotiating for lower fees with your provider, although this is not always feasible for small businesses.

The bottom line

Credit card surcharges and convenience fees are solutions that help you offset the cost of processing fees and pass the costs on to your customers.

Ultimately, it is up to you to evaluate the pros and cons of imposing extra fees on your customers. You should also keep in mind that not all states permit checkout fees in credit card transactions. 

Finally, since there’s no way to eliminate interchange fees altogether, it’s best to choose a payment processor like Payment Depot that charges no markups/hidden fees and offers membership-based wholesale rates that allow merchants to save more as they process more payments. Contact us today to learn more.

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