The legalities of charging customers a credit card processing fee — what you need to know.

Regardless of the size of your business, one reality about accepting credit card payments remains the same: Your merchant account provider will slap you with a surcharge for every credit card transaction you process. Although each of these costs may seem tiny, they add up over the course of a month. This may lead you to wonder if you should charge customers a credit card fee or surcharge to cover these fees.

What is surcharging?

A credit card surcharge is a small fee that a merchant adds to the price of the transaction. It is used to cover the cost the merchant must pay their account provider to process a credit card payment. This surcharge is added to the advertised price of the product at the point of sale. By contrast, the practice of cash discounting involves deducting the transaction cost from what a consumer pays. While cash discounting is legal everywhere in the U.S., there are still some places where surcharging remains against the law. Before you attempt to institute a surcharge, make sure it is permitted in your state.

Regardless of your jurisdiction, there is another important factor to consider. You cannot impose a surcharge on either prepaid credit or debit cards. Additionally, surcharge limitations apply only to consumer businesses; governmental and educational entities are governed by separate laws and regulations.

How does surcharging affect the specific cards you accept?

Let’s say you live in a state where surcharging is legal, and you decide to implement it. Before you do, you should realize that each of the major card companies — Discover, Visa, Mastercard, and American Express — has established its own set of guidelines. In general, however, you can expect the following requirements from all four.

• You must notify your merchant services provider and the card company in writing at least 30 days in advance of when you plan to implement the surcharges.
• You cannot charge more than the card company’s transaction rate and cannot exceed four percent (two percent in Colorado). In other words, you cannot make a profit off surcharges.
• You must post appropriate notice of the surcharges in your store, both at the entrance and at the point of sale. If your business is an ecommerce operation, this information must be displayed on your checkout page.
• On the customer receipt, the surcharge must appear as a separate line item. Except for American Express, the amount must also be included in the network authorization request and settlement.
• For Visa and Mastercard, you can choose to impose surcharges for the entire brand (all Mastercards, for example) or only on specific types of cards within the brand. That being said, you cannot do both.

Once you have done all of these things, you will also need to contact your payment processing company to ensure that your gateway and processing hardware are properly configured to reflect the new surcharge.

Should you impose a surcharge: The bottom line.

Now that you understand what surcharges are and how they differ from discounting, and once you have determined that you are legally allowed to require your customers to pay a little extra to use their credit card in your state, you may still be wondering if surcharging is right for you. On one hand, the practice is becoming more widely accepted by businesses and customers alike in light of evolving laws and the tumultuous economic conditions brought about by COVID-19. For many stores, surcharging enabled them to stay afloat during the worst of the pandemic.

On the other hand, surcharges are not for everyone. If you have good reason to believe that you will lose your best customers by alienating them with the fee hike, or if the majority of your competitors are mega-stores that can undercut your pricing, you may ultimately decide to absorb credit card transaction charges, considering them to be an unavoidable cost of doing business.

That being said, you don’t necessarily need to suffer in silence when transaction costs are over-burdening your business. If things seem to be spiraling out of control with your current processor, particularly if you are on a flat rate or tiered price plan, strongly consider transitioning to a provider who will let you use the more transparent and affordable interchange-plus model. Choice and flexibility are becoming the hallmarks of most reputable providers in this extremely competitive marketplace, so do all you can to stand up for your business and your customers by finding the fairest way to keep everyone’s costs down.