Passing on Credit Card Fees to Customers: A Guide for Merchants

Passing on credit card fees to customers can be a delicate matter, but it's essential to understand the rules and regulations surrounding this practice. In the US, for instance, the Truth in Lending Act requires merchants to clearly disclose any additional fees to customers.

Some states have implemented specific laws governing the passing on of credit card fees to customers. For example, California's Song-Beverly Credit Card Act prohibits merchants from charging a surcharge for credit card payments.

A surcharge is a small fee added to a customer's transaction when they pay with a credit card. The purpose of the surcharge is to help cover the merchant's processing costs.

You can't charge surcharges to prepaid cards or debit cards. Even when a transaction is "run as a credit" (i.e., signature debit), the transaction is still exempt from a surcharge due to the Durbin Amendment of the Dodd-Frank Wall Street Reform and Consumer Protection Act's restrictions.

The surcharge acts to prevent the merchant from losing money to credit card fees while giving the customer a choice to either pay with a credit card and cover the surcharge or to choose a non-credit payment method, so they don't have to pay.

Here are some key things to know about surcharges:

Surcharging has a long and complex history in the United States. Prior to 2013, it was prohibited by the card brands, specifically Visa and Mastercard.

The rules on surcharging have changed over the years. In 2013, a class action lawsuit against Visa and Mastercard resulted in a settlement allowing businesses to charge customers a fee for using credit cards.

Businesses must follow specific rules to charge these fees. In 2019, the State of New York and plaintiffs reached an agreement to dismiss a case, allowing New York businesses to begin surcharging, provided that businesses disclosed the fees to customers in dollars and cents.

Visa has recently lowered the surcharge cap from 4% to 3% (or the actual cost of processing, whichever is lower). This change may impact businesses that had been charging the higher fee.

The rules on surcharging vary by card network. Credit card networks, such as Visa and Mastercard, have guidelines on surcharges, including surcharge limits and notification requirements for both the network and customers.

Here are some key rules on surcharging in the US:

Surcharge policies can be a delicate matter for businesses, but with the right approach, they can be a win-win for both you and your customers. Businesses have to strike a balance between covering their costs and keeping customers happy.

To ensure compliance with laws and regulations, it's essential to follow best practices for implementing surcharge policies. This includes adhering to restrictions on the maximum allowable surcharge and making sure that your surcharges cover the cost of transaction processing but do not generate profit. You must also maintain transparent communication with customers by disclosing the surcharge policy clearly.

Setting reasonable surcharge levels is crucial to avoid driving customers away. A common practice is to set the surcharge at a level equivalent to what credit card companies charge you for transactions. This way, you're not profiting from the surcharge, but rather recovering your costs.

To make things easier, here are some key guidelines to keep in mind:

By following these guidelines, you can implement a surcharge policy that is fair, legal, and transparent, and minimally disruptive to customer relations.

There are currently only two states where surcharging is explicitly prohibited: Connecticut and Massachusetts. If your business operates in either of those states, you may not charge credit card fees to your customers.

California, Texas, and Utah have anti-surcharge laws on the books, but they are being challenged in court or are currently unenforceable. This means businesses in these states may be able to surcharge, but it's essential to check the current status of these laws.

Several states are considering or have pending legislation that would make surcharging illegal if passed, including Hawaii, Illinois, New Jersey, and Rhode Island. However, many experts believe it's unlikely that new bans on surcharges would actually go into effect due to successful court challenges.

Some states have specific requirements for surcharging, such as Maine and New York, which require businesses to post the cost of cash transactions and the cost of credit card transactions in dollars and cents.

Here's a list of states where surcharging is prohibited or has specific requirements:

Businesses operating in multiple states must be aware of the different regulations surrounding surcharging. If you do business in multiple states, you may surcharge credit card transactions only in states where it is permitted.

It's essential to note that credit card networks, such as Visa and Mastercard, have guidelines on surcharges, including surcharge limits and notification requirements for both the network and customers.

If you're considering passing on credit card fees to customers, you should explore alternative options first. One alternative is to offer a cash discount, which is allowed in many states and can be a win-win for both businesses and customers.

Many gas stations already engage in this practice, so it's not a new concept. This way, customers who pay with cash can receive a discount, and businesses can still cover their credit card processing costs.

Another alternative is to impose a minimum purchase amount, which is allowed for credit card transactions up to $10. This ensures a higher transaction amount, making it more worthwhile to eat the cost of credit card processing.

However, you cannot impose minimums on debit card transactions. It's essential to consider these alternatives before deciding to pass on credit card fees to customers.

Here are some key factors to consider before implementing surcharges:

These factors can help you make an informed decision about implementing surcharges and ensure that you balance your financial needs with customer expectations and legal requirements.

Businesses need to consider the impact on customers when deciding whether to pass on credit card fees. Businesses should understand that customers may choose alternative payment methods or even different businesses if they feel the surcharge is unfair.

To avoid customer dissatisfaction, businesses should clearly communicate the surcharge policy to customers through visible signage, statements on websites, or verbal notifications during transactions. This transparency is key to maintaining positive customer relationships.

Businesses should also consider the frequency of credit card transactions. If a business has high volumes of credit card transactions, surcharges may help offset processing fees. However, if a business has fewer credit card purchases, the impact of surcharges may be limited.

Customer Notices are crucial for businesses that plan to implement a surcharge policy. Businesses must notify their customers of the fee, both at the entrance to their store and at the point of sale.

Ecommerce stores must post the notice on the checkout page and include the fee on the receipt. This is a requirement to ensure customers are aware of the surcharge before completing their transaction.

The notice must explain when the surcharge will apply, such as all credit card transactions or all Visa transactions. It should also include the surcharge rate and a comment reassuring customers that the fee does not exceed the processing fees the business actually pays.

Businesses can find resources on the Visa website to help implement a surcharge, including downloadable signage. However, this signage is specific to Visa and may not apply to other brands.

Here are some examples of how businesses can notify their customers of a surcharge:

Businesses must ensure their surcharge policy is well-documented and easily accessible to customers. This includes details on how the surcharge is calculated, how it's applied, and any relevant legal compliance information.

As you expand your business globally, it's essential to consider the unique laws and regulations surrounding surcharges in different countries. In some countries outside the US, surcharges are either regulated differently or prohibited altogether.

For multinational businesses, compliance with local laws and credit card network rules is crucial to avoid any potential issues or fines. This requires careful research and understanding of the regulations in each country where you operate.

If you're planning to conduct business in multiple countries, you'll need to navigate the varying regulations surrounding surcharges. This can be a complex and time-consuming process, but it's essential to get it right to avoid any issues down the line.

When dealing with credit card fees, it's essential to consider the issuer and location-specific regulations that apply to your business.

You'll need to check the surcharging laws in your state, as each state has its own rules and limitations.

Each card brand has its own rules and limitations, so you'll need to understand the requirements of each before you start surcharging.

If you have a large business operating in multiple locations across the country, surcharging laws impact each location individually.

You can add a surcharge in states where it is permissible, but ensure compliance with the specific laws and regulations of each state where you choose to enforce a surcharge.

Here are some key points to keep in mind: