When a customer pays by credit card, it’s a relatively stress-free process. They swipe or tap their card if they’re attending a physical store, or input their details if it’s an online purchase. They pay the amount stated and that’s it. It sounds easy, doesn’t it? Well, behind that process is another layer of complexity, also known as credit card surcharge rules.
According to reports, US merchants paid more than $110 billion in credit card processing fees in 2022 alone. From this figure, it’s no surprise that many businesses choose to add a credit card surcharge to card payments, ensuring that these fees don’t eat into their profit margins. There are enough complications involved in high-risk payment processing as it is, but credit card fees can take it to another level if you’re not fully informed from the start.
In this guide, we’ll talk in detail about credit card surcharge rules, including what they are, why they’re used, the psychological aspects, regulations, and everything else in-between. In the end, you’ll find it easier to implement a strategy that suits your business the best.
TL;DR
- Credit card surcharges allow businesses to recoup processing fees, but they come with complex economic, legal, and reputational considerations.
- Surcharge legality varies by state, with some banning them entirely and others imposing strict disclosure and fairness rules.
- Card networks like Visa and MasterCard have detailed requirements for surcharge implementation, including caps, disclosures, and registration procedures.
- Businesses must carefully manage customer experience, compliance, and potential backlash when deciding to add surcharges.
- Alternatives like offering cash discounts, adjusting pricing structures, or using fee-inclusive pricing can offset costs without risking negative perceptions.
- Internationally, surcharge rules differ significantly, requiring businesses to navigate local laws and card brand rules when operating abroad.
- The future of surcharges is shaped by legal challenges, regulatory shifts, changing consumer expectations, and evolving payment technologies.
The Dual-Faced Economics of Credit Card Surcharges
First things first, let’s look at why credit card surcharges are often a necessity for businesses.
On average, credit card processing fees can be anywhere from 1.5% to 3.5% of the transaction value. Premium rewards cards usually have the highest fees because of the extra benefits they give. However, it’s not the customer that pays the fees, it’s the merchant – that is unless a surcharge is introduced.
Without adding a credit card surcharge, businesses could lose 23% to 38% of their profits due to credit card fees, impacting low-margin businesses in particular. However, when surcharges are implemented well, they can help to recover a substantial amount of the processing fees. This isn’t something new – according to a survey, 34% of small US businesses now add a surcharge on credit card transactions to help them avoid drastic profit losses.
The True Cost Structure Behind Surcharges
With the basics explained, it’s time to take it further. Every credit card surcharge includes a complex fee structure that includes interchange fees, assessment fees, and processor markups. It’s important to understand these components when creating your surcharge strategy and when choosing the best POS system for your needs.
The table below outlines the different fee components in more detail:
Fee Component | Typical Range | Description | Impact on Surcharge Calculation |
Interchange Fees | 1.15% – 2.95% | Paid to the card-issuing bank | Primary component (70-80% of total cost) |
Assessment Fees | 0.13% – 0.15% | Paid to card networks | Secondary component (10-15% of total cost) |
Processor Markup | 0.25% – 1.00% | Paid to payment processor | Variable component (often negotiable) |
Monthly Fees | $5 – $50 | Fixed costs from processor | Must be amortized across transaction volume |
Interchange-Plus vs. Tiered Pricing Models
There are several pricing models to choose from, including interchange-plus and tiered pricing. The interchange-plus model gives transparency as it clearly separates the interchange fees from any processor markups. This allows more accurate calculations on the surcharge itself.
On the other hand, tiered pulls together fees into three separate rates, including qualified, mid-qualified, and non-qualified. The downside here is that surcharges can then be less accurate and potentially higher.
Hidden Cost Elements Beyond Processing Fees
As if credit card fees weren’t enough, there are other costs that are passed onto the merchant, including PCI compliance fees, monthly statement fees, chargeback fees, and payment gateway fees. While not necessarily hidden, these fees can sometimes be a driver behind different surcharge strategies but don’t often get explained to customers. As a result, it creates dissatisfaction and a gap in perception between what merchants have to pay and what customers understand.
While not all of these fees can be avoided, sidestepping excessive chargeback fees is possible by choosing the best payment processor from the start. At PayCompass, all of our merchant accounts come with built-in chargeback prevention tools, helping you avoid these often high fees.
Psychological Impact on Consumer Behavior
Nobody wants to pay more than they should, so it’s vital to communicate credit card surcharge rules clearly and sensitively. When you do this, most people will at least understand why they need to pay slightly more by choosing a card payment, although there may always be a small number of people who remain unsatisfied. In this case, offering alternative payment options, like cash or digital wallet payments, is a good route.
For instance, a study showed that 19% of customers asked to pay a surcharge on a credit card payment chose another payment method instead.
Framing Effects and Price Perception
How you frame a credit card surcharge matters. It can be the difference between the customer being happy with their experience or the total opposite. For instance, rather than labeling the surcharge as a credit card fee, you could describe it as a cash discount. This is likely to be met with less resistance.
Ultimately, it’s how you word the situation and present it to someone and that can have a big impact on whether they understand its necessity and accept it, or choose to walk away.
The Loyalty Paradox
If you have regular customers in your business and you suddenly need to implement credit card surcharge rules, you may meet resistance. This is down to the ‘loyalty paradox,’ which means repeat customers feel ‘entitled’ to better treatment because of their long relationship with your business.
To avoid this, you could consider a loyalty based exemption or a tiered surcharge structure.
State-by-State Regulatory Landscape
Now we know what credit card fees are and why they often lead to surcharges, it’s time to talk about regulations. The complicating issue here is that they vary by state and it’s vital to understand the particular rules where you are to avoid non-compliance. It’s also important to know your merchant rights in payment processing in these situations.
States with Outright Surcharge Prohibitions
There are several states that, despite federal court challenges, have a total ban on surcharges on credit card transactions. However, under some guidelines, cash discount programs may still be permitted. These include Kansas, Connecticut and Massachusetts, which have the strongest rules. Violation penalties can be significant, so understanding these rules is vital.
Connecticut's Unique Restrictions
First, let’s turn our attention to Connecticut. This state prohibits all surcharges, but will allow cash discounts if clearly communicated and posted in store or online. However, there is a line that should not be crossed – merchants must not add a fee for credit card use, but can offer a discount for cash payments. Not following this rule can lead to penalties up to $500 per violation at the very least.
Massachusetts and the Two-Price System
Massachusetts is slightly different and has a ‘two-price’ system. In this case, merchants can use dual pricing but display both the credit card and cash prices clearly if they differ. While not an outright ban on surcharges, it does require the merchant to have specific signs and remain in compliance at all times. In particular, signs for both prices must be posted clearly at the entrance and point of sale.
States with Conditional Restrictions
Credit card surcharge rules vary according to state and card network, making it important to remain up-to-date and compliant.
Source: Unsplash
There are some states that allow surcharges but have particular restrictions that must be followed to remain compliant.
Colorado's Disclosure Requirements
One such state is Colorado, which allows surcharges but caps them at 2%, along with clear disclosure at the entrance, point of sale, and on all receipts. Alongside this, all of these points must show the exact surcharge percentage and it should not be hidden in any fine print. We’re talking clear and obvious here.
Failure to comply could lead to violence of the Colorado Consumer Protection Act.
Florida's Post-Litigation Landscape
Florida originally had a surcharge ban but legal challenges led to the state allowing surcharges as long as merchants clearly disclose the exact amount before the transaction and on receipts after payment. Within this, the wording must be extremely clear and not at all misleading about how much the customer will pay in total.
Failure to comply leads to potential penalties under the Florida Deceptive and Unfair Trade Practices Act.
New York's Evolving Regulations
Florida wasn’t the only state that had their credit card surcharge rules changed following legal action. In New York, merchants can now use surcharges but they have strict disclosure requirements. The credit card price must be clearly shown at the point of entry, point of sale, and also on receipts. Also, the total price including the surcharge must be clearly shown, and not just the percentage.
The New York Attorney General’s Consumer Frauds Bureau enforces these rules and violations could lead to penalties of $500 per occurrence.
Implementation Steps for Multi-State Operations
Businesses that work across states often face challenges in ensuring they don’t accidentally violate any surcharge regulations. It’s vital to utilize technology here, and in-depth staff training.
Geolocation-Based Compliance Systems
Geolocation-based compliance systems are a must. These automatically default to the credit card surcharge rules based upon the location of the transaction. Advanced POS systems are also key, as these can integrate IP-based location or GPS data to apply the correct rules very accurately.
The table below has some useful information on the credit card surcharge laws by state:
State | Surcharge Status | Maximum Rate | Key Disclosure Requirements | Violation Penalties |
California | Prohibited (as of July 2024) | N/A | N/A | Up to $1,000 per violation |
Colorado | Permitted with restrictions | 2% or cost of acceptance | Entrance, POS, receipts | $500 per violation, treble damages |
Connecticut | Prohibited | N/A | Cash discounts allowed with proper signage | Up to $500 per violation |
Florida | Permitted | 4% or cost of acceptance | Clear and conspicuous disclosure | Up to $10,000 per violation |
Massachusetts | Two-price system required | No explicit cap | Both prices displayed with equal prominence | Varies by violation |
New York | Permitted with restrictions | Cost of acceptance | Total price disclosure | Up to $500 per violation |
South Dakota | Permitted with restrictions | Cost of acceptance up to 4% | Entrance, POS, website, receipts | Varies by enforcement action |
Texas | Legal status contested | 4% or cost of acceptance | Advance disclosure required | Varies by enforcement action |
Card Network Rules and Compliance Requirements
Credit card surcharge rules go beyond state regulations. In this case, card networks themselves have their own regulations that must be followed. For high-risk industries, this can add to the list of complications in terms of payment processing, and it’s vital to have all the information to make careful strategy decisions.
Visa's Surcharge Framework
Visa surcharge rules caps the amount at either the merchant’s cost of acceptance of 3%, whichever is lower. It’s also vital to inform Visa in writing at least 30 days in advance before implementing surcharges. To ensure compliance, Visa maintains a searchable merchant registry of registered surcharge businesses, so customers can check compliance.
Brand-Level vs. Product-Level Surcharging
Visa also allows businesses to choose between brand-level or product-level surcharging. Brand-level means that the same surcharge is applied to all Visa credit cards. However, product-level surcharging is more in-depth and requires advanced POS systems to identify card types and apply the right fee.
MasterCard's Distinct Requirements
Mastercard surcharge rules are similar to Visa’s. However, there are some slight differences. Surcharges are capped at the lowest of either 4% or the merchant’s cost of acceptance, and the cost calculation must include all fees. Supporting documentation must be kept in case of an audit.
However, cross-border transactions have different rules, with international surcharges subject to origin and destination regulations. This can add extra complications for international businesses, and once more requires careful record-keeping.
To test compliance, Mastercard has “mystery shopper” programs that randomly check surcharge practices, ensuring compliance.
American Express's Unique Approach
Amex surcharge rules are slightly different to Visa and Mastercard, potentially complicating compliance for businesses.
Source: Unsplash
Amex surcharge rules are based on a different approach to both Visa and Mastercard, which can complicate matters if you’re not completely clear on what to expect.
The biggest difference is “non-discrimination” provisions that stop businesses applying surcharges to Amex cards, despite them charging potentially higher merchant fees in general. They also keep a merchant monitoring system that can track implementation across the network, and triggers a check on any potential breaches.
Violation of these rules can trigger a contract review, potentially resulting in termination or rate increases. This is particularly damaging to businesses that rely heavily on Amex payments.
Discover's Flexible Framework
Finally, Discover surcharge rules are quite flexible, although there are still regulations that must be adhered to. Overall, the rules look a lot like those imposed by Mastercard and Visa, but there are fewer disclosure requirements, so it’s a little easier to remain compliant. Monitoring of implementation is also less strict, and the network focuses more on customer complaints than a set surcharge audit system of their own.
Strategic Implementation and Risk Management
When implementing your surcharge strategy, it’s about more than just being in compliance. It’s also about planning, execution, and risk management. It’s vital to prioritize customer experience along with operational challenges to create the smoothest transition possible.
Competitive Market Analysis
Before adding surcharges, you should carefully look at your competitors and understand what they are doing, alongside the general norms of your industry. This will help you identify the advantages and disadvantages of utilizing surcharges.
Technical Implementation Challenges
Once you have decided upon the best surcharge policy, next look at the technical implementation challenges. Does your current POS facilitate surcharges or will you need to upgrade? If you’re an ecommerce business, does your platform allow you to calculate surcharges automatically depending on location or will you need a plugin?
Accounting System Integration
Another aspect to consider is integrating your new surcharge policy into your accounting system. This is a vital aspect of proper financial tracking, and it’s essential for your tax reporting compliance and analytics.
Your accounting system must be able to record surcharges as a separate revenue line item, and track surcharge revenue against processing costs. Finally, it should handle surcharge refunds accurately.
Customer Communication Strategies
Communicating with your customers is vital for many reasons. But when it comes to credit card surcharge fees, it’s even more important. Simply adding the fee and not openly communicating about it will put you in possible hot water from a regulation point of view, but it can also upset your customers.
In this case, it’s vital to have a careful strategy that ensures you remain transparent every step of the way. The first point of communication is pre-implementation, explaining to your customers how and why you will be charging a fee for credit card transactions. For the best results, test this with a small group of customers to look for the correct language and framing before sending it on a larger scale.
Your message should be sent around 60 to 90 days before you plan to implement the changes, and it’s vital to explain the business point of view clearly. Finally, offer alternative payment methods in case customers don’t want to pay the surcharge.
Staff Training for Customer Questions
When implementing a new surcharge strategy, and even due to questions from an existing one, your front-line employees should be trained to effectively answer customer queries and worries. This could include simple explanations of why surcharges are needed, along with alternative payment options that don’t require surcharges. It’s also important to empower your employees to make exceptions in some cases, particularly for high-value customers.
Training programs should center around knowledge and confidence building, using scripts for common problems. Guidelines should be established for exceptions, giving employees clear parameters for when they can waive a surcharge and when it’s not appropriate.
Alternative Approaches to Offsetting Processing Costs
Not all businesses want to go down the surcharge route, and in that case, there are some alternative options to help offset high credit card fees and processing costs.
Cash Discount Programs as Surcharge Alternatives
One popular alternative to surcharges is to offer a discount to customers who want to pay cash. This is still a surcharge policy but it’s presented very differently, therefore motivating non-card payments.
In most cases, cash discount programs offer a 2-4% price reduction, essentially matching payment processing costs. To implement this program, credit card prices need to be advertised as the standard price in all areas, including menus, shelf tags, marketing materials, and online. To remain in compliance with legal distinctions and regulations, all signs should emphasize the discount rather than a penalty for using a card to pay.
Minimum Purchase Requirements
Another option is to have minimum transaction amounts for card acceptance. This helps to protect profit margins on small sales, when processing fees would effectively eat up a large proportion of it.
To implement this type of strategy, identify the break-even transaction amount, i.e., where processing fees are below the target percentage of sale value. This is usually around 2-3%. However, many card networks have guidelines regarding minimum purchase requirements under the Dodd-Frank Act. This means that businesses can set minimums for up to $10 for credit cards but can’t impose these values on debit card transactions.
Dual-Pricing Strategies
Many companies choose dual pricing to overcome surcharge issues. This means there is a different price point for cash payments and card payments, with an average 2-4% difference. In this case, the difference isn’t actually labeled as a surcharge, so it’s possible to use this strategy in some highly-regulated markets.
To remain in legal compliance, it’s vital to present the card price as the standard price with cash framed as a discount or special offer. All marketing materials must be consistent with this approach.
Technology Solutions for Dual Pricing
It is possible to utilize dual pricing through modern payment technologies and POS systems, helping to create a seamless experience for customers and businesses alike.
Additionally, many ecommerce platforms now allow different prices to be displayed based on which payment method the customer chooses. However, this usually requires modifications to the custom checkout to adjust dynamically. To remain compliant, price changes are clearly displayed before the final purchase screen.
International Surcharge Considerations
Credit card surcharge rules are different from region to region, requiring businesses to remain vigilant and compliant.
Source: Pexels
Many businesses trade internationally, especially online companies. In this case, credit card surcharge regulations can be complicated, and it’s critical to understand them fully to avoid non-compliance.
Regional Regulatory Frameworks
Regulations around surcharges vary wildly across different countries. Some have no issue with them, others restrict them, while others prohibit them entirely. Similarly, some countries impose criminal charges while others have civil penalties.
European Union Surcharge Directives
Business trading within the EU must comply with the Payment Services Directive 2, or PSD2. This prohibits any surcharges on customer credit or debit cards within the EEA but allows them on commercial cards and cards not issued within the EU.
To further complicate this, there are country-specific variations despite this directive, with some EU member states requiring additional disclosure requirements. Some extend the ban to all card types. To help overcome these issues, it’s important to use geolocation detection to understand where the card originated from and then apply surcharges according to rules in that area.
Asia-Pacific Regulatory Diversity
The Asia-Pacific area also has large amounts of diversity across the board. For instance, Australia allows surcharges but caps them cost the business incurs to accept the payment. However, New Zealand allows surcharges to remain uncapped but has detailed disclosure requirements.
On the other hand, South Korea, Japan, and China all have different rules regarding surcharges, so it’s important to understand these in detail when trading across the vast Asia-Pacific region.
Currency Considerations and Cross-Border Transactions
When trading across borders, there are currency considerations to consider. These can complicate matters, especially when it comes to accurately calculating surcharges.
In many cases, cross-border transactions have higher payment processing fees. This was particularly noticeable for UK businesses following Brexit. At that time, Visa and Mastercard increased their interchange fees for cross-border payments from 0.2% to 0.3% and 1.15% to 1.5% respectively. Due to this seemingly small change, UK businesses paid an extra £150-200 million in costs.
For this reason, it’s important to find a payment processor that makes cross-border and multi-currency payments easier. At PayCompass, we help you to streamline multi-currency payments, allowing you to stay competitive despite the fees involved.
Dynamic Currency Conversion Interactions
Many businesses offer Dynamic Currency Conversion, or DCC services. These are preferred because they allow a customer to pay for their goods and services in their home currency, making it easier for them to know what they’re paying and encourages them to stay loyal due to a high level of transparency. However, this can further compound surcharges as it increases transaction costs.
If your business offers DCC, it’s important to think about how surcharges interact and develop clear communication and disclosure routes so customers don’t face a large sum at the end.
Exchange Rate Fluctuation Impacts
Currency fluctuations can cause even more problems when setting surcharges as percentages. This means the surcharge will not remain the same across the border, potentially causing issues when the credit card fees aren’t covered. In most cases, currencies aren’t so volatile that major issues can be noticed, but during times of economic turmoil, it can be.
However, for traditionally volatile currencies, surcharge caps in the customer’s currency is a good option. Alongside this, always communicate both the percentage rate and the maximum surcharge amount in the local currency to avoid confusion.
Future Trends and Evolving Landscape
As technology and regulations change and evolve, credit card surcharge strategies must do the same. While it’s impossible to look into the future with accuracy, staying up-to-date with trends can help you understand what is likely to happen and prepare for it accordingly.
Legal Evolution and Court Challenges
There are many constitutional challenges to credit card surcharge rules across some states and many of these have succeeded in changing the rules. It is possible there will be more of these in the future, but keeping a close eye on developments is key. Within this, regulatory focus is slowly shifting away from total bans on surcharges to disclosure standards, with a greater focus on transparency.
However, enforcement patterns show a clear focus on disclosure compliance rather than the actual implementation. In this, regulators target misleading practices rather than the actual surcharges themselves.
Technological Disruption and Payment Evolution
Many new payment technologies are lurking on the horizon, and these could change the surcharge landscape beyond measure. They have the power to introduce new fee structures, change regulatory considerations, and boost customer expectations.
Cryptocurrency Payment Impacts
Cryptocurrencies have been around for a long time, but until now, many people have been put off using them because of their volatility. However, adoption is slowly growing and this means businesses must start to consider how to implement digital currency payment methods and their associated surcharges.
Cryptocurrency payments typically have fixed transaction fees, unlike credit cards which have percentage-based costs. This requires a different cost structure, perhaps moving toward flat-fee surcharges as time goes on.
Real-Time Payment Networks
Real-time payment networks, such as RTP and FedNow offer low-cost options and usually charge fixed per-transaction fees. This cuts out the need for surcharges on small transactions, and could be a good option for the future.
Learnings Recap
We’ve covered a lot of ground, and it’s clear that credit card surcharges are complex and require careful consideration. This doesn’t only relate to legal and regulatory compliance but also to how customers feel about surcharges in general, based on how they’re presented to them.
All this requires careful consideration, especially given the different credit card surcharge laws by state and those imposed by card networks themselves. Carefully navigating these challenges requires planning, careful training execution, and risk management, but it’s entirely possible with the right tools.
At PayCompass, we understand the challenges associated with high-risk payment processing and how it can easily become a headache if you let it. With that in mind, we’ve created dedicated high-risk merchant accounts that cut out a lot of the problems you face on a regular basis. Of course, we can’t take away every challenge, but we can make your life easier, including when creating a quality POS to handle credit card surcharge rules.
To find out what we can do for you and how quickly we can accept you as a customer, contact us today. After all, why deal with problems when everything can be simple?
