Surcharging 101: Understanding the Basics

Aug 17, 2017 by Kenzie Earle

For businesses that accept credit cards, processing fees are a constant pain. Varying pricing models, vague regulations and new technology often create unwanted expenses. In fact, 55 percent of America's 27 million small businesses do not accept credit cards. But with credit and debit cards being nearly as common as cash, merchants are starting to pay attention to accepting credit card transactions. Surcharging offers businesses a means of defraying costs associated with credit card acceptance by recovering the higher costs from the customer.  

Currently, 11 states in the United States have laws prohibiting surcharges, which forces merchants to raise prices or accept a lower margin on credit card sales. A group of small businesses recently challenged New York's law prohibiting merchants from surcharging credit card transactions. The businesses wanted to surcharge the extra 2 percent to 3.5 percent they incurred from credit card transactions as their right to commercial free speech. On March 29th, in the case of Expressions Hair Design vs. Schneiderman, the U.S. Supreme Court ruled 8-0. The decision recognized that New York's no surcharge law infringes upon free speech and is a violation of the First Amendment. As the law moves closer to allowing businesses to surcharge credit card transactions, it is important to understand surcharging from every standpoint. 

What is a Surcharge?

A surcharge (sometimes  known as a card surcharge or checkout fee) is a fee that a merchant adds to a customer’s bill when a credit card is used for payment. Surcharging does not apply to cardholders when either a debit card or prepaid card is used for purchase or when cardholders using a debit card, choose "credit" on the point- of- sale terminal. This is often done as a way to pay for the interchange fee merchants are charged for each transaction by the credit card companies.

What are the procedures surrounding surcharging?

Merchants who choose to surcharge must follow consumer disclosure and other requirements in accordance with the 2013 legal settlement for merchants implementing surcharging. Merchants should also comply with all applicable state or federal laws. The basic requirements for surcharging are as follows:

  • The first step for businesses is to notify Visa and MasterCard of the intent to surcharge credit cards at least 30 days prior to implementing surcharging.
  • The card processor company must also be contacted so that the credit card machine is reprogrammed.
  • Surcharges must be listed separately as a line item on customer receipts.
  • The surcharge cannot be more than 4% of the transaction total, or the actual cost to process cards, whichever is lower.
  • Merchants must post signage informing customers of surcharges.
  • Signage must be located at entrances to stores, at the points of sale and on the company website.
  • Installing point- of- sale terminals that are EMV enabled for credit card payments is crucial. Prior to the October 2015 EMV deadline, the bulk of the liability following a data breach or similar payment fraud fell to financial institutions. Now, the individual business processing a credit card transaction is liable for the fees, fines and possible lawsuits that result from a payment security breach. 

What are some factors to consider before surcharging?

According to the TSYS U.S. Consumer Payment Study, credit card usage is greater during online shopping and department store transactions. Before choosing to surcharge, U.S. merchants should examine a number of factors including the potential impact on customer experience, steps taken by competitors in the market, the type of information that must be disclosed to customers, and the cost of credit cards and other forms of payment to the merchant. Surcharging comes with benefits, and consequences as well, so it’s important to weigh whether surcharging will work for your business.  

Pros and Cons of Surcharging

The overwhelming benefit of surcharging is that businesses no longer have to bear the burden of expense for credit card processing fees. By passing the fees to customers, a merchant can reduce expenses while still allowing customers their choice of payment type. It will allow customers to see more transparently how much each payment rail actually costs. Passing on fees and being more transparent with your customers will be a major cost reduction for businesses with thin margins. However, a study found that 64.5% of consumers aren’t willing to pay fees to use credit cards. Customers may dislike surcharging so much that they could choose to patronize other businesses that do not surcharge, thus negatively affecting a merchant's overall sales and marketing initiaives. 

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