What Are Credit Card Surcharges?

Credit card surcharges are additional fees a business adds to a customer’s bill when they pay with a credit card. These fees are different from merchant service charges, which merchants pay to their payment processor or bank for handling credit and debit card transactions. In contrast, credit card surcharges are like credit card fees for customers and are designed to offset the merchant’s cost of accepting credit cards. Typically, these costs range from 1% to 4% of the transaction amount, depending on the credit card network and the terms of the merchant’s agreement with their payment processor.

For example, if a customer makes a purchase of $100 and the merchant has a surcharge of 3%, the total cost to the customer would be $103. The $3 surcharge is intended to cover the merchant’s cost of processing the credit card payment, allowing the business to maintain its profit margin on the sale.

Are Credit Card Surcharges Legal?

Credit card surcharge rules and regulations vary by region and credit card network. In the United States, surcharges for debit cards are never legal, even if they carry a credit card logo or are processed as a credit card. Surcharges for credit cards, on the other hand, are generally allowed but subject to specific rules and regulations that vary from state to state. Many states are passing anti-surcharging and anti-junk-fee legislation. Such legislation hopes to eliminate hidden or deceptive charges passed on to consumers by businesses. 

For instance, as of this writing, states or territories such as Connecticut, Maine, Massachusetts, Oklahoma and Puerto Rico don’t allow surcharging, while others — such as Colorado, Minnesota, New Jersey and New York — have some requirements. Merchants are responsible for checking with their acquirer or lawyer before implementing surcharges and need to stay updated on local regulations to ensure compliance.

The Consumer Financial Protection Bureau (CFPB) is increasingly targeting such surcharges and credit card junk fees within the payments industry. In January 2022, the CFPB launched an initiative to scrutinize and reduce junk and surcharge fees to help consumers save money. In addition, in October 2023, the Biden-Harris administration announced wide-ranging actions to protect consumers from junk surcharge fees. 

In addition to state credit card surcharge laws, credit card networks such as Visa, Mastercard and American Express have their own rules regarding surcharges. These networks typically require that businesses provide clear disclosure to customers about the surcharge before the transaction is completed. This includes displaying the surcharge amount or percentage prominently at the point of sale or online checkout, as well as proper disclosure on the transaction receipt. Overall, the surcharge can’t exceed the cost of accepting the credit card and can’t be higher than 3% for Visa and 4% for Mastercard transactions.

Pros and Cons of Credit Card Surcharges

Implementing credit card surcharges can have advantages and disadvantages for your business. Understanding these can help you make an informed decision about whether to adopt surcharging as a strategy.

Pros of Credit Card Surcharges

• Cost recovery: The most significant benefit of surcharges is that they allow businesses to recover the cost of processing credit card payments. This can be especially important for small businesses with tight margins, where even a small percentage of lost revenue can impact profitability.
  
• Transparency: By charging a surcharge, businesses can increase transparency with customers about the cost of credit card transactions. Customers who understand that these fees are being passed on to them may be more inclined to use alternative payment methods, such as debit cards or cash, which typically have lower processing fees.
  
• Encourages cash payments: Surcharges can incentivize customers to use cash or debit cards, reducing the overall cost of payment processing for the business. This can be particularly beneficial in industries with thin margins, where every dollar saved counts.

Cons of Credit Card Surcharges

• Customer dissatisfaction: One of the main drawbacks of surcharging is the potential to alienate customers. Some customers may view surcharges as unfair or as an attempt to nickel-and-dime them, which could result in lost sales or negative reviews.
  
• Complex compliance: Navigating the legal landscape of credit card surcharges can be challenging. Businesses must ensure they are compliant with state laws and credit card network regulations, which can change over time. Failing to comply with these rules can result in fines or the loss of the ability to accept credit card payments.
  
• Competitive disadvantage: If competitors do not charge surcharges, a business that does may find itself at a competitive disadvantage. Customers who are sensitive to price differences may choose to patronize businesses that do not impose these additional fees.

Best Practices for Implementing Credit Card Surcharges

If you decide to apply credit card surcharges, following best practices can help ensure that the process is smooth and that customer satisfaction remains high. Here are some tips to keep in mind.

1. Communicate Clearly
   Transparency is key when it comes to surcharging. Make sure that customers are fully aware of any surcharges before they make a purchase. This can be done through signage at the point of sale, clear notifications on your website and verbal communication from staff. Customers should never be surprised by a surcharge at the end of a transaction. Additionally, there must be clear disclosure of the itemized surcharge amount on the transaction receipt.
   
   
2. Ensure Legal Compliance
   Stay informed about the laws and regulations regarding surcharges in your state and industry. Regularly review your policies to ensure they are in line with current legal requirements. Consulting with a legal expert or your payment processor can provide clarity on what is permissible in your area.
   
   
3. Apply Reasonable Surcharge Amounts
   When setting surcharge amounts, it’s important to keep them reasonable. The surcharge should only cover the cost of processing the credit card payment and should never exceed 3%-4% of the transaction amount, depending on the credit card. Overcharging customers can lead to dissatisfaction, fines and potential legal issues.
   
   
4. Offer Alternatives
   To maintain customer satisfaction, consider offering alternatives to credit card payments. Encourage customers to use debit cards, cash or digital wallets, which may have lower processing fees. Offering a discount for cash payments can also be an effective way to avoid surcharges while still covering your costs.
   
   
5. Notify Your Processor or Bank
   To maintain compliance with the credit card brands, you must notify your processor or bank 30 days prior to implementing a surcharging policy. This ensures proper registration with the card brands.
   
   
6. Monitor Customer Feedback
   After implementing surcharges, keep a close eye on customer feedback. If you notice an increase in complaints or a drop in sales, it may be worth reevaluating your surcharge policy. Remember, customer perception is critical to the success of your business.
   

Navigate Surcharges Carefully

Credit card surcharges can be a valuable tool for businesses looking to offset the costs associated with accepting credit card payments. However, implementing these surcharges requires careful consideration of the legal landscape, customer expectations and competitive factors. By following best practices, businesses can navigate the complexities of surcharging while maintaining positive relationships with their customers.