Credit Card Surcharging Guide For Merchants

Credit card surcharging is gaining steam amongst merchants to cover payment processing fees. We’ve created this guide to break down all there is to know about surcharges and whether or not you or your business should charge them. We will also break down the difference between cash discounts and surcharges.

While Visa and Mastercard play a role guided by their own surcharge rules, it’s important to note that states also have their regulations. It might be surprising, but surcharges are illegal in certain states and heavily regulated in others.

After reading this guide on surcharges, you’ll understand better if it’s safe to implement surcharges and if you should.

Before breaking down surcharges in detail, let’s look at what surcharges are and then explain the difference between surcharges and cash discounts.

What Is A Credit Card Surcharge?

Credit card surcharging is the practice of merchants adding a fee to a credit card transaction to offset the merchant’s credit card processing fees.

Typically, the merchant would absorb the expense, but with surcharging, the cost is carried over and covered by the consumer.

Another term for surcharging is zero fee or free credit card processing. 

States That Do Not Permit Credit Card Surcharging

To avoid confusion, let’s go over which states where surcharges are illegal yet unenforceable due to court decisions in recent years. These states are the following:

  • California
  • Florida
  • Kansas
  • Maine
  • New York
  • Oklahoma
  • Texas
  • Utah

The following states/territories do not allow credit card surcharging in any form:

  • Puerto Rico
  • Connecticut
  • Massachusetts

This can change, but as of 2022, these anti-surcharging laws are still in place.

If your business operates out of one of the states listed above, imposing a credit card surcharge is illegal. However, remember that while you can’t legally impose a credit card surcharge, you can still deduct a cash discount.

Note: Due to the Durbin Amendment of the Dodd-Frank Wall Street Reform and Consumer Protection Act, it is illegal to impose surcharge fees on prepaid and debit cards. This also means running a debit card as credit and charging a surcharge fee is unlawful.

Maine/New York

Maine and New York allow credit card surcharging but follow their own rules. You will need to post the price of each product if the consumer pays with cash and if they pay with a card if you operate in Maine or New York.

Should You Charge A Surcharge?

The answer to this is not a simple one. A merchant/customer relationship is significant when creating lifelong customers.

We recommend checking your market to see what others in your industry are doing, as you don’t want customers to feel like you are ripping them off or being distrustful.

Should you want to save money on processing fees, offering a cash discount could be a good decision as customers might feel like they’re not being ripped off.

Credit Card Surcharging VS Cash Discount

It’s important to note that both of these methods aim to pass the fees from the merchant to the consumer. The difference is the way that it is passed to the consumer.

With a surcharge, the fees are added to the advertised price, so if the transaction was $40, it now becomes $42 or whatever the additional cost is.

In other words, cash discounts are when the cost is deducted from the advertised price, whereas surcharging is when the fee is added to the advertised price.

The main difference is that cash discounting is legal everywhere in the US, and surcharging is still prohibited in some states.

Choose The Right Payment Processor

Choosing a suitable payment processor can significantly help when it comes to deciding on surcharges. Surcharges are typically agreed upon when a merchant feels they are paying their payment processor too much in fees.

For this reason, it is wise always to explore options to ensure you get fair rates for your business.

At Corepay, we understand that there are many additional fees for merchants, so we ensure we provide the most transparent/affordable pricing available.

Tips For Surcharging

Now that you understand the surcharging rules better, let’s dive deeper into some tips for merchants and also break down how much you should charge.

Notify Card Brand Networks such as Visa, Mastercard, American Express, and your acquirer/payment processor: Notifying these entities are a must when deciding on a surcharge.

Merchants must provide written notice, and phone calls are not accepted.

Note* You will want to give at least a 30 days notice to your card brand networks and payment processing partners.

When reaching out to your processor, you will want to inform them of your intent to start surcharging customers. You will then speak with your account representative and ask them how they want you to proceed.

 

Give Customers A Heads Up

Should you decide that you are going to start surcharging, you will want to give appropriate notice to all of your customers.

The best practice for surcharging is to inform customers upon entry of your store and inform them at the checkout.

It is best to use signs that show precisely the rate you will be charging and a written notice that tells your customers you won’t exceed your processing fees.

Below you will find various card brand’s advice for surcharging.

 

*Looking to surcharge for eCommerce? We recommend informing customers during the checkout process and on the receipt. 

Properly Document All Surcharges For Customers And Your Partners

When implementing surcharges, you need to include the surcharge as a line item informing customers at your point of sale system.

At this time, no specific wording needs to be used; you have to let your customers know. 

It’s important to note that you must also report all surcharges to your credit card networks and processing partners.

You will need to figure out if your current system supports this. Lastly, the surcharge needs to be detailed on your receipt to your customer.

Square currently allows the practice of surcharging but does not have a great way to break down the surcharge fee. 

If you use Square, you will notice that the processing fee is deducted from the total transaction. Meaning after tip, tax, and surcharge. As you can see, this can become incredibly confusing and impossible to offset Square fees with a surcharge.

With this being said, Square does recommend specific tools to calculate the surcharge fees for merchants.

How Do Merchants Calculate Surcharge Fees?

When calculating surcharge fees, always check with your payment processor and review state and card brand laws before imposing the fee.

When it comes to credit card surcharges, they can not exceed the actual cost to process the transaction. The cap for credit card surcharges is currently 4% in all states, except Colorado being 2%.

Your MSP or merchant service provider will program your payment gateway to calculate and apply surcharges to transactions automatically for you.

Wrapping Up

Credit card surcharging and cash discounts are essential topics that all merchants should be aware of today.

Moving forward, we advise you to look at your industry and some patterns to decide if surcharging or cash discounts are suitable for your business.

Should you have any questions, drop a note at the link below. Before heading out, we recommend checking out our credit card processing terminology guide here.