This article is part of a larger series on Payments.
Credit card surcharging is when a merchant applies an extra fee if a customer chooses to pay via credit card instead of a different payment method like cash. Merchants have to pay payment processing fees to accept credit cards, so the surcharge is passed on to the customer to recover those fees.
There are many pros and cons to credit card surcharging, and it is not allowed in some cases. This article covers credit card surcharging in detail and helps you determine whether it’s right for your small retail business.
If you decide to set up credit card surcharging for your business, there are many state and local laws to comply with and policies set by card issuers like Visa. Instead of trying to navigate this yourself, partner with a payment processor like Stax to automate compliance and surcharges at the point of sale.
Types of Surcharges
There are different types of credit card fees that may apply to either the merchant or the customer. When discussing credit card surcharging, you may often hear of convenience fees and service fees. Learn the difference between the two.
What Is a Convenience Fee?
A convenience fee is an additional charge that the customer must pay for choosing to use a payment method that doesn’t match the merchant’s preferred method. If a merchant prefers credit card payments, for example, they might add a convenience fee for cash, check, or over-the-phone payments.
What Is a Service Fee?
A service fee is a type of convenience fee that only applies to merchants with certain merchant category codes (MCCs) in education and government. While Visa specifically differentiates the service fee from the convenience fee, American Express and Mastercard put it under their convenience fee programs.
What Is Cash Discounting?
Cash discounting is when you offer a lower price to customers who pay with cash—the opposite of surcharging and fees. Merchants practice it as a way to lower credit card processing fees. Some states require specific pricing displays to show customers that there are different prices for cash and card payments.
Credit Card Issuing Company Policies on Surcharging
The most common question around credit card surcharging is whether or not it’s allowed. The answer is usually—but not always. In addition to state-level laws, which we cover below, credit card companies set their own policies. Generally, surcharges can only be applied to credit transactions (not debit or prepaid cards). American Express does not allow surcharging at all.
Visa Credit Card Surcharge Rules
Visa refers to a credit card surcharge as a payment card surcharge or checkout fee.
It allows merchants to add cc surcharges to transactions, though merchants must disclose the fee ahead of time, at your store entrance and at the point of sale. It also needs to be listed on your receipts. You’ll need to notify Visa and your acquiring bank at least 30 days prior to implementing the surcharge.
You can choose to add surcharges to all Visa cards (brand level) or specific types of Visa cards (product level), but not both. You also can’t add surcharges to debit or prepaid card transactions.
Mastercard Credit Card Surcharge Rules
Like Visa, Mastercard requires merchants to notify it and the merchant’s acquiring bank 30 days prior to implementing the credit card surcharge. Also like Visa, Mastercard requires full disclosure and transparency to all customers before adding a surcharge and allows merchants to choose whether to apply the surcharge at the brand or the product level.
American Express Credit Card Surcharge Rules
American Express charges some of the highest interchange rates of all credit card companies. And unfortunately, it doesn’t allow credit card surcharging as a way for merchants to make up for it.
State-by-State Credit Card Surcharging Laws
Most states allow merchants to engage in credit card surcharging. However, the following states put limitations on it:
- California: Merchants cannot add credit card surcharges but can choose to offer discounts on cash, check, and debit card payments so long as this option is made available to every customer.
- Colorado: Credit card surcharges were once banned, but that changed in 2021. Now, surcharges are maxed out at 2% of the total cost to the buyer.
- Connecticut: Similar to those in California, merchants in Connecticut can only offer discounts for alternative forms of payment. The discount must be reflected as such as a line item on the receipt.
- Florida: Florida follows suit with California and Connecticut, prohibiting surcharges but allowing for discounts if made available to all customers.
- Kansas: Merchants may not add credit card surcharges.
- Maine: Surcharges are prohibited, but discounts are allowed.
- Massachusetts: Only discounts are permissible.
- New York: Businesses can offer discounts for other forms of payment. However, discounts and discounted prices may not be advertised—instead, merchants must advertise the highest price and inform customers at the point of purchase.
- Texas: Surcharges are prohibited in most cases, though there are a few exceptions.
Pros & Cons of Credit Card Surcharging
There are many reasons you might consider adding a credit card surcharge. Processing fees eat into your profits, and there’s really no such thing as free credit card processing, so those fees are a necessary evil. However, the answer isn’t always cut and dry. In some cases, you may not have a choice. Credit card surcharging may be restricted by card issuers and merchant service providers, and, as noted above, some states outlaw it.
If credit card surcharging is allowed where you do business and by your merchant account, read these highlights and drawbacks to assess whether it’s right for you.
Lowers Credit Card Processing Fees
If you’re looking for the cheapest way to process credit card transactions, surcharging can be one option. Rather than paying for the fees, you’re almost passing them on to your customer. Though it’s not a one-for-one exchange, it certainly helps recoup some of those losses. This can be a major advantage considering merchants paid over $110 billion in processing fees in 2020.
Promotes Other Payment Types
When you add a credit card surcharge, customers will feel more inclined to pay via other methods that are more affordable. This is valuable if you want to reduce the number of credit card payments you process. Instead, you might promote cash, mobile wallet, check, gift card, or even ACH direct deposit via invoicing for subscription-based models.
Harms the Customer Experience
The customer experience is so important, and adding a surcharge can sour that interaction with your brand. It leads to inconsistent pricing and unexpectedly high prices at checkout. Further, you could embarrass a shopper at the register. As many as 93% of American Express cardholders want surcharges removed, and 25% wouldn’t return to a business that adds surcharges.
May Cause Lost Sales
Credit card surcharges can lead to missed sales. If shoppers don’t want to pay the extra fees, they may seek the items elsewhere. They already pay interest to the credit card companies, so they’re not going to be keen on adding fees from merchants.
How to Calculate Credit Card Surcharge Amounts
The easiest way to calculate credit card surcharges is to use a flat percentage rate such as 2% or 3%. However, some merchants may choose a flat dollar rate (such as 10 cents per transaction). The maximum credit card surcharge rate you’re allowed to charge is 4%, so any calculation must result in an amount lower than that rate.
When calculating credit card surcharges, always use the total transaction amount on which all of your other fees and taxes will be based upon. Remember, credit card surcharges need to be the same across the board—you can’t charge more for one credit card company and less for another.
To figure out what surcharge rate is best for your business, read your statements from your merchant account provider to find out what fees you are currently paying, including your average transaction fee. Use that as a baseline for your surcharge. So, if your average transaction fee is currently 3%, then consider using 3% as your surcharge rate. Or use a payment processor that will automate this process for you, such as Stax.
In 2022, it’s not really a question of if you should accept credit card payments. It’s more a matter of how, especially considering credit card purchases are on the rise again after a brief dip in 2020.
A cc surcharge can be a great way to lower your credit card processing rates. However, it’s important to keep in mind that shoppers are increasingly going cashless. When you can provide a multitude of shopper-friendly payment options, you’ll have happy customers who will hopefully sing your praises and come back for future purchases.