Credit Card Surcharges

Sometimes, you’ve got to pay to get paid. Credit cards may be a convenient and widely-used payment method, but maintaining the system that makes credit card transactions possible isn’t cheap. Banks and card networks charge merchants fees for their payment processing services, leaving merchants to either eat the costs or pass them on to their customers.

One way of implementing the latter option is to charge customers a surcharge for each credit card transaction. How do credit card surcharges work, and are they a good way for merchants to recover the costs associated with processing credit card payments?

Merchants pay a lot for the privilege of accepting credit card payments. The typical rate is somewhere between 1.5 to 3.5% of the purchase amount, which can add up quickly.

This includes the interchange fee, which is charged by the card network and passed on to the issuer, as well as smaller fees charged by other entities like the acquirer or merchant services provider.

Merchants have taken the payment card industry to court over these fees, and have been granted some flexibility in how they can mitigate the cost of these fees.

In most regions, merchants are allowed to add a credit card surcharge to their transactions. This allows them to cover some or all of the cost of their fees in a direct and transparent way, but there’s always some pushback from customers whenever new charges get thrown into the mix.

What Are Credit Card Surcharges?

A credit card surcharge is an extra charge that you add to every credit card transaction to offset the cost of your credit card processing fees. If you typically pay 3% per transaction, you could include a surcharge at the same rate. Then, if a customer purchased an item for $100, you would actually charge $103 to their card, effectively making it a zero-fee transaction for you.

Surcharges aren’t legal everywhere. In the US, they are banned in Colorado, Connecticut, Massachusetts, Puerto Rico, and until recently, Kansas. Card networks also have rules about how and when they can be used. Surcharges can’t be levied against prepaid or debit cards, even if they’re run as signature debit transactions over the card brand network.

Surcharges aren't new. Government agencies, charitable organizations, and academic institutions have been able to use them for a long time. They’re less common in the world of retail, but the lawsuit has opened the doors for wider usage.

What many retailers use instead of surcharges are cash discounts. This means that the costs of credit card fees are baked into your pricing, but you offer an equivalent discount to customers who pay with cash or debit cards. Cash discounts are legal everywhere and less objectionable to consumers, but using them means increasing your list prices, which can hurt you if you’re in a market with lots of competition.

Some merchants charge a “convenience fee” that largely serves the same purpose as a credit card surcharge. These are fixed fees that don’t have to tie back to your processing costs, but the card networks have specific rules for implementing them.

What Do Merchants Need to Know Before Introducing Surcharges?

You must adhere to the following rules if you want to start collecting credit card surcharges. They are applicable to all card networks, although American Express is a bit of an outlier and does not impose the same requirements on advance notice or receipt itemization. Also, some states have additional laws about rate caps and required notices, so check with your acquirer to make sure you aren’t missing any important steps.

• The card network and your acquirer or merchant services provider must be notified of your intent to introduce surcharges 30 days in advance.
• Merchants cannot profit off of surcharges, they can only recoup costs. The surcharge cannot exceed the effective rate you are charged for transactions, and can never exceed 4%.
• You must inform customers that credit card transactions include a surcharge by posting notices at your store entrance (if you have a physical location) and at the point of sale (your cash register or checkout page). This notice should specify when surcharges are applied, the rate the customer will be paying, and a brief explanation of the surcharge’s purpose.
• Surcharges must be itemized on the customer’s receipt and included in the authorization requests and settlements you submit to the card network.

Merchants can use brand-level surcharges, which apply to all cards associated with a particular card network, or product-level surcharges, which apply only to cards from certain issuers or particular types of cards. For Visa and Mastercard surcharges you have to choose one or the other, the networks will not allow you to use both kinds of surcharges.

What Are the Drawbacks of Credit Card Surcharges?

The most obvious downside of surcharges is just the inverse of its primary benefit: passing the cost of credit card fees on to your customers means they’re paying more, which can lead to dissatisfaction and drive them toward your competitors.

A recent survey by PYMNTS.com shed some light on how consumers really feel about credit card surcharges. It turns out that 85% will pay a surcharge when it is presented to them, but that doesn’t mean they’re unbothered by it—21% say that being asked to pay surcharges detracts from their satisfaction with the purchasing experience, and 56% claim it would make them “highly likely” to look for a different place to shop.

The good news is that exposure appears to lessen resistance to surcharges. The more often consumers encounter them, the less likely they are to oppose paying them.

Ironically, the fact that consumers will try to avoid paying surcharges may produce some unintended benefits for merchants. If a customer decides to pay with cash or a debit card to avoid a surcharge, then that’s one more transaction that can’t come back to haunt you as a credit card chargeback.

Conclusion

Every merchant would like to see their processing fees disappear and their revenue go up, but determining whether or not it’s a good idea to introduce credit card surcharges depends on a number of factors.

In some industries, such as those that are adjacent to the public sector, your customers may be familiar with surcharges and understand their purpose. In highly competitive industries, however, it may be a tactical error to present your customers with add-on charges.

Ultimately, it’s up to each merchant to decide the best way for them to mitigate their payment processing costs. The more knowledge you have, the easier it is to make a choice that will be good for both your customers and your bottom line.

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