The short answer is yes—you can legally pass on credit card fees to customers. However, this is not as easy as it seems. Credit card fees are governed by regulations from card networks as well as federal and state laws, which make passing on credit card fees to customers available for one merchant but limited for another.
Key takeaways:
- Federal and state laws allow merchants to legally pass on credit card fees to customers but with strict regulations.
- Card networks also impose strict rules on passing on credit card charges to customers.
- This method is also referred to as free credit card processing, achieved by either imposing surcharge or convenience fees.
- Credit card transaction costs are composed primarily of fees imposed by card networks.
Often referred to as free credit card processing and zero-cost processing, passing on credit card fees to customers was heavily restricted until recently, when merchants began making their cases against the continued rise in transaction rates.
How to Legally Pass Credit Card Fees to Customers
There are two ways to pass on credit card fees: charging a convenience fee and applying surcharges. We discuss each method below:
Charging a Convenience Fee
A convenience fee is a fee imposed on service transactions made by phone or online with a credit card. The amount is usually fixed—such as service fees when buying tickets and paying bills—or it can be a certain percentage of the total amount as when paying your taxes online.
Where are convenience fees legal?
Adding a convenience fee is legal in all 50 US states although there are still state and card network regulations that need to be observed.
Regulations around convenience fees
Please note that, generally, convenience fees are allowed in all states, however, it is important to check with your local government for any new regulations around convenience fees.
Below are the general guidelines for convenience fees from card networks:
Card Network | Business Type | Payment Type | Fee Type | Convenience Fee Disclosure |
|---|---|---|---|---|
Visa | With physical and online store | Mail, Phone, Online transactions | Flat fee | Prior to transaction, No need to include on receipt |
Mastercard | With physical and online store | In person, Mail, Phone, Online, Recurring transactions | Flat fee, percentage, or tiered based on transaction | Prior to transaction, No need to include on receipt |
American Express | With physical and online store | In person, Mail, Phone, Online, Recurring transactions | Flat fee, percentage, or fixed based on transaction | Prior to transaction, No need to include on receipt |
Discover | Allows convenience fee as long as it is in equal treatment with other credit card brands | |||
Applying Credit Card Surcharging
When credit card fees are passed to customers via surcharging, merchants are adding the payment processing cost directly to the cost of the product or service. This method can be used for both in-person and online transactions and requires some reprogramming of your point-of-sale (POS) system with your payment processor.
Where is credit card surcharging legal?
As of this writing, credit card surcharging is available in all but two states (Connecticut and Massachusetts), Washington D.C., and Puerto Rico. However, certain limitations are observed in some areas (California, Florida, Kansas, Maine, New York, Oklahoma, Texas, Utah).
Regulations around surcharging
Unlike convenience fees, surcharging is highly regulated by both card networks and state laws.
From Card Network:
Surcharging Laws by State:
Free Credit Card Processing: Types, Legality & Solutions
Learn more about credit card surcharging.
Pros & Cons of Passing Credit Card Fees to Customers
Some of the trade-offs for passing on credit card charges to customers are:
| PROS | CONS |
|---|---|
| Covers some of the payment processing cost | Does not account for incidental fees |
| Minimizes chargebacks | Potential lost sales from customers paying with credit cards |
| Improves cash flow | Additional compliance requirements |
Applying surcharging and convenience fees help merchants mitigate ever-increasing card network interchange rates. It frees up more of the business operating funds for activities that improve sales. Additionally, customers who may want to avoid paying surcharge and convenience fees opt for cash or debit payments, which can help merchants reduce the risk of chargebacks.
On the other hand, not all expenses related to credit card payment processing can be covered by the 2%–4% surcharging and convenience fees. Merchants will still have to pay for expenses such as verifications, PCI compliance, and any monthly fees. There is also a huge risk of losing customers who prefer to pay with their credit card, not to mention the compliance requirements involved.
Zero-cost Processing Tips & Best Practices
Sustainability is a key consideration for merchants who plan on passing on credit card processing fees to customers. So the question of “should you?” instead of “can you?” comes into play. The following best practices will serve as a guide and also help you decide if zero-cost processing is right for your business.
Check With Your Local Government for Regulations
If your state does allow merchants to legally pass on credit card fees to customers, make sure to contact your local government office for more information particularly applicable to your business. Not only will this ensure that your information is up to date, it will likely make the entire compliance process easier to manage.
Know Your Customers
Understanding how your customers pay can help you decide whether or not you need (or should have) a free credit card processing program. If most of your clients pay with alternative methods other than credit cards, then installing and paying for surcharging or convenience fee programs is not cost-effective.
On the other hand, if most of your clients pay with a credit card, note which card brands are primarily used and check card network rules, such as how to notify customers of your surcharging program, before implementing either surcharging or convenience fee.
Consider Your Competitors
One big merchant concern with charging credit card fees to customers is the risk of losing sales to competitors. To avoid this, consider your competitors before signing up for a zero-cost processing program.
Check your competitors within your industry and even within the area of your place of business whether or not they apply a surcharge or convenience fee. If yes, then you should be less concerned about losing customers.
Work With A Payment Processor
This is particularly important if you intend on signing up for a surcharging program. While you have the option to set up surcharging on your own, the risk of non-compliance that can cost you your merchant account and ultimately your business is very high. To ensure full compliance, work with a payment processor that can help you manage card network rules and observe state laws while setting up and implementing a surcharging program.
Frequently Asked Questions (FAQs)
These are some of the questions we commonly encounter about passing on credit card fees to customers.
This depends. The biggest question is if it would do your business more harm (lost sales) or good (savings on payment processing cost) in the long run. For instance, customers are more understanding of small businesses and startups that apply a surcharge for card payments, but if your competitors within the area do not add a surcharge, you may still lose sales.
The average range of convenience and surcharge fees is from 2% to 4% per transaction. It’s important to check card networks and state laws for any changes.
Based on card network and state laws, customers should be notified of a credit card surcharge before a payment is processed. Merchants are also legally required to post signages at the entrance and at the checkout area about their surcharging program.
Bottom Line
The issue of passing on credit card fees to customers continues to be a highly debated topic. Merchants who are trying to keep their business sustainable amidst the increasing interchange rates are in favor of this method, but understandably, customers view this as unfair practice.
So is it legal to charge a credit card fee to customers? Yes. But the real question is “should you?” Passing on credit card fees to customers isn’t for everyone and merchants should consider asking the help of experts such as payment processors to better understand if this strategy is best for their business. Learn more about free credit card processing.
