What is credit card surcharging? And is it the right move for your business model? 

Consumers are paying with credit cardsThe fact is, it costs money for merchants to accept credit cards as a form of payment. If you own a business that charges consumers for your products or services, you know this. But many consumers don’t really think about it. They just want to pay in the most convenient way for them. They often just don’t realize that the merchant has to give up a portion of their profits to accept credit cards from their customers. 

And not only does it cost money to accept credit cards, but not all credit cards are created equal. Corporate, airline miles, and other reward cards have higher interchange fees than a basic credit card does. And they are all more expensive to accept than a debit card.  It costs the merchant much more to accept a reward, miles, or corporate credit card. So, in a way, the merchant pays for the consumer to earn their airline miles. 

Add to that the fact that America is becoming a more cashless society with each passing year. Consumers are using digital payments more than they ever have before. With technology such as Real-Time Payments (RTP) and mobile wallets making it easier to pay people and businesses, consumers feel less compelled to carry cash.

Think about the fact that there will be 44.5 million credit card holding Gen Z consumers by the year 2022. As younger generations that have grown up and are very comfortable with technology age into the workforce, we see more and more use of digital payments.More digital and mobile payments

All of this means that a larger portion of a merchant’s total transactions are digital and credit card transactions. This adds up.

Merchants have tried many ways to offset the cost of accepting credit cards.

Throughout the past several years, merchants have turned to various different programs to help address the cost of accepting credit cards. Some businesses would implement a “check out fee” for anyone using a credit card. In some states, business owners have tried to offset costs through the use of a cash discounting program. This type of program was created largely because adding a true credit card surcharge was either illegal or frowned upon. 

Often, as a way to offset these costs, the merchant will build the costs into their pricing. This is a common practice for accounting for the fixed costs of running a business. But with credit card processing fees, this means even the cash buyers are paying for the cost of accepting credit cards. 

Another way to offset costs is to impose a minimum purchase requirement. This solution requires consumers to spend a certain amount if they plan to use a credit card for payment. 

The ability to impose a minimum purchase requirement has only been legal since 2010. Prior to that, major card brands prohibited merchants from imposing a purchase minimum. They argued that their cardholders should be able to pay with a credit card just as easily as they would cash. But, retail merchants and small business organizations argued that for many businesses with small transaction amounts, the amount it costs to accept credit cards could make accepting them unprofitable. Their answer to the problem? Allow merchants to require a minimum purchase to pay with credit. 

They granted their request. Congress agreed to allow merchants to impose a minimum purchase on credit card transactions. The provision became a small part of a larger Act created to protect consumers that went into law in July 2010. This Act is the Dodd-Frank Wall Street Reform and Consumer Protection Act. As per the provisions within the Act, the minimum purchase requirement cannot exceed $10. 

A compliant credit card surcharging program may be the best solution.

Some business owners feel that the right way to handle the whole situation is to charge credit card users a fee to pay with their credit card. This is where a true, and compliant, credit card surcharge program comes into play. 

Now, this is not to be confused with a minimum purchase requirement in order to pay with a credit card. A minimum purchase requirement means that a customer must spend a minimum amount set by the merchant if they plan to use a credit card for payment.

With a credit card surcharge program, the merchant adds a small surcharge to the purchase total for credit card transactions. It doesn’t matter how big or small the purchase amount is. The surcharge is calculated as a flat percentage of the total purchase price and added to the sale.

This surcharge passes on some of the costs associated with accepting credit cards to the cardholders. This is often the best way for smaller businesses, or ones with slim profit margins, to remain profitable while offering customers more payment options. In many circumstances, a surcharge program makes more sense for the customers than a minimum purchase requirement. 

Credit card surcharge vs minimum purchase requirement – how will it affect your customer?

A retailer’s primary goal is to please the customer and gain them for life. One of the best ways to make the buying experience a happy one is to make the purchase process as frictionless as possible. The last thing you want to do as a merchant is to rub your customer the wrong way. 

Calculate whether credit card surcharging works for your business

Many businesses have a smaller average ticket price, so they will process several smaller transactions all day. If your average ticket price is between $4 and $8 dollars, applying a $10 minimum purchase price for credit card transactions would alienate most of your customers.

In this situation, it is much more considerate and cost-effective to apply a credit card surcharge to all credit card purchases. This way you’re not inconveniencing customers. Nor are you asking them to purchase more than they intended to use their card. And for small purchases, the appropriate surcharge would not be too offensive.

However, merchants can’t just begin charging a surcharge on their own. There are rules and regulations set by the card brands merchants must follow. And, depending on the state the business is operating in, it may be illegal.

Is a credit card surcharge right for your business?

Business owners also need to consider whether implementing a surcharge is right for their business. They need to take into consideration their business model, average purchase transaction, and customer base. 

It’s also important to keep in mind that the major card brands are generally opposed to the practice of surcharging. They hold the position that it penalizes cardholders for wanting to use their credit card for payment.

Major card brands such as Visa and MasterCard expect universal acceptance of their cards. They don’t condone any act that could hinder usage for their customers. American Express isn’t necessarily opposed to minimums or surcharges. But they do require equal treatment for all card brands. If you’re going to apply a surcharge to one card brand or type, you must apply a surcharge to all card types and brands alike.

Card brands and credit card issuing banks feel that the many benefits that card acceptance brings the merchant are greater than the cost. 

  • Accepting credit cards caters to the customer’s payment preference. 
  • Lends to a faster and more convenient checkout.
  • Increases sales.
  • Brings enhanced security with guaranteed payment and fast processing times.

Get help from an experienced merchant service provider.

You also need to make sure it’s legal in your state. Several states still have laws that may prohibit or limit surcharging. As of this writing, they include Colorado, Connecticut, Kansas, Maine, Massachusetts, and Oklahoma.  Other states, such as California, continue to have ongoing court appeals surrounding merchants’ ability to add a credit card surcharge. In California, a law still stands banning surcharging, but the Attorney General isn’t allowed to enforce the law. 

This is where you lean on your merchant services representative. They will be able to advise you on the laws in your state. Then they can help you calculate the correct surcharge amount based on your rate. And make sure that the surcharge is appropriate for your business model and your customer base. 

Comprehensive Guide to Credit Card Surcharging Regulations. Follow credit card surcharge rules

Surcharges are only legal in the U.S.

Merchants can only impose a surcharge within businesses operating in the U.S. and U.S. territories only. Merchants can only impose a surcharge in the states where surcharging is legal. Surcharging is prohibited outside the U.S. (there are a few limited exceptions). Global merchants operating multiple locations may surcharge in their U.S. locations and not in their foreign locations.  

Equal treatment for all card brands.

Most merchants accept Visa and MasterCard as well as American Express and Discover. Each card brand has its own rules for surcharging. Merchants must meet all the requirements for each card brand before they begin surcharging.

American Express has specific rules in its merchant guide regarding “treatment of the American Express brand”. They require merchants to treat the Amex card the same way all other brands are treated. In other words, if you impose fees on Amex cards, you must impose them on all other card brands equally.

Merchants must inform card brands in advance.

Card brands require merchants to notify them 30 days prior to implementing a surcharge program. Merchants must fill out a specific notification form and submit it to both the card brands and their acquirer for approval. 

Surcharging applies to Credit transactions only.

 Merchants are not allowed to apply a surcharge to debit card or prepaid card transactions. Even if a customer chooses “process as credit” at the time of the transaction, they still consider it a debit transaction.

Card brands impose limits on the amount of surcharge allowed.

Merchants are not allowed to profit from a surcharge. The card brand rules state that a surcharge cannot exceed the cost of acceptance. Card brand rules cap the amount that it allows a merchant to surcharge at 4%. Even if the cost of accepting credit cards exceeds 4%, they only allow merchants to pass on a maximum of 4% to the customer.

Merchants must work with their merchant services representative to calculate to appropriate surcharge for their business.

It requires proper signage and customer notification.

Merchants must display proper signage notifying customers of the intent to surcharge credit card transactions. The surcharge must be disclosed as a merchant fee. 

Merchants must display signage at the point of entrance, at the point of sale, and on every receipt. 

Merchants must also itemize the final surcharge separately on the customer receipt. 

You need an experienced merchant service provider to help you begin a compliant credit card surcharging program. 

Any of these rules could be easily violated if a merchant were to try to implement surcharging on their own. Many aren’t possible without the help of the merchant service provider.

At Bankcard Brokers, we’re experienced, educated, and reputable. We work hard to help our clients decide what will work best for their business and their customers.

Our ETA-Certified Payment Professionals will help you decide on a fair surcharge rate to pass on to customers. They will also program your equipment to apply the surcharge to the correct transactions and create a line item for the surcharge on the receipt. Terminal programming ensures that you never add a surcharge to a debit card transaction. And as your representative, we will help you properly notify your acquiring bank and the card brands. Lastly, we’ll make sure to provide you with compliant signage to display for your customers.

If you’re ready to offset your credit card processing costs and put that money back towards your bottom line, call us today. 

Get Started