The Fine Print on Surcharges

Aug 15, 2024

Surcharges

Maximizing Revenue While Mitigating Risk

Surcharges have become a complex issue for merchants, with varying regulations across jurisdictions and potential financial implications. Understanding the distinction between surcharges and convenience fees, as well as the specific rules governing credit, debit, and prepaid card transactions, is essential for businesses to avoid legal and operational challenges.

Key Takeaways

Surcharging Laws Vary Widely: Surcharge regulations differ significantly between states and even between credit card networks. Merchants must understand the specific rules in their operating area to avoid legal issues.
The Importance of Transparency and Communication: Clear and upfront communication about surcharge policies is essential for maintaining customer satisfaction and preventing disputes. Merchants should inform customers about any additional fees before the point of sale.
Balancing Cost Recovery and Customer Satisfaction: While surcharging can help offset credit card processing costs, excessive fees can deter customers. Merchants must find a balance between recovering costs and maintaining customer loyalty.

What is a Surcharge?

A surcharge is an additional fee imposed by a merchant on a customer’s purchase when a credit
card is used as payment. This fee is distinct from a convenience fee, which may be charged for
using alternative payment methods. Credit card networks have specific rules governing
surcharges, requiring merchants to clearly inform customers about these added costs. While
surcharges are directly linked to credit card use, convenience fees are applied for the added value
or ease of using specific payment options. Merchants must carefully adhere to surcharge
regulations to avoid legal and financial repercussions.

Can U.S. Merchants Add a Surcharge to Credit Card Transactions?

Under current regulations, U.S. merchants can impose surcharges on credit card transactions.
However, there are specific rules about how these surcharges can be applied. Merchants must
choose between a “brand level” surcharge, which is a flat fee for all cards of a particular brand
(e.g., Visa, Mastercard), or a “product level” surcharge, which varies based on the specific type
of credit card (e.g., Visa Signature). The optimal choice depends on a merchant’s customer base
and transaction volume. Regardless of the method, open communication with customers about
the surcharge is essential for maintaining trust and complying with industry regulations.

Is Surcharging Limited to Credit Card Transactions?

Surcharging is strictly prohibited for debit and prepaid card transactions. This restriction is due
to differences in processing costs and consumer protection regulations. While credit card
processing often involves higher fees, debit and prepaid cards typically have lower costs.
Merchants should focus on understanding and complying with the specific rules for each card
type to avoid penalties.

Surcharge Disclosure and Compliance

Merchants must provide clear and upfront information about surcharges to customers. This
includes displaying signage, providing details on receipts, and notifying card networks.
Transparency is crucial for building customer trust and avoiding disputes. Additionally,
merchants must stay informed about state-specific surcharge laws, as these regulations can vary
widely. Non-compliance with surcharge rules can lead to significant penalties and damage a
business’s reputation.

Surcharge Laws and Restrictions

Surcharge laws vary significantly by jurisdiction. Currently, surcharging is prohibited in
Connecticut, Maine, Massachusetts, New York, and Oklahoma. These states have enacted
legislation preventing merchants from imposing additional fees for credit card payments. The
primary reasons for these restrictions are consumer protection and ensuring fair marketplace
practices.

It’s crucial for merchants to familiarize themselves with the surcharge laws in their operating
states. Non-compliance can lead to substantial penalties and legal repercussions. Moreover,
transparent communication about surcharge policies is essential for maintaining customer
satisfaction and avoiding disputes.
While some states permit surcharging, specific regulations and limitations may apply. Merchants
should consult with legal counsel or their payment processor to stay updated on the latest rules
and requirements.

For merchants accepting competing card brands other than Visa and Mastercard, the concept of ‘level playing field’ comes into play.

Discover has a non-discrimination policy which states it is permissible to surcharge on
Discover transactions if all competing cards are surcharged as well; hence the level playing field
concept. Discover surcharge cannot exceed the Cost of Acceptance for the credit card sale.
Amex has a non-discrimination policy, but their regulations require imposing equal treatment
across all Other Payment products. A payment product is defined as any charge, credit, debit,
stored value, prepaid, smart card, account access devices or other payment cards, services or
products other than the Card. Since the Amex requirement includes debit and prepaid products
and it is against Visa and Mastercard rules to surcharge debit and prepaid products, merchants
wishing to charge a surcharge would be considered non-compliant (from an Amex rules
perspective) in certain scenarios.
Visa and Mastercard are not subject to the “level playing field” concept since both allow
surcharging. A merchant may surcharge either one of the brands or both. The merchant cannot
charge more than the cost of acceptance for their card brand and cannot exceed 4% (even in
cases where the merchant’s cost of acceptance exceeds 4%) (Visa reduced to 3% effective April
15, 2023). Canada –2.4%. (Worldpay does not currently support surcharging in Canada).

Navigating the Surcharge Landscape

The dynamic nature of credit card surcharge laws necessitates ongoing vigilance for merchants.
To effectively manage surcharge practices, businesses should:

Consult with legal and financial experts: Understand the specific regulations in your
operating region and how they impact your business.
Maintain clear and transparent communication: Inform customers about surcharge
policies upfront to avoid misunderstandings and disputes.
Stay updated on industry changes: Credit card networks and regulatory bodies
frequently modify surcharge rules, so staying informed is crucial.
Consider alternative payment options: Offering discounts for cash or debit card
payments can help offset credit card processing costs without imposing surcharges.
Balance cost recovery with customer satisfaction: While surcharges can help offset
costs, excessive fees may deter customers.

By carefully considering these factors and adhering to legal requirements, merchants can
successfully navigate the complexities of credit card surcharging while maintaining positive
customer relationships.

ePayment assumes no liability for any errors or omissions in the content. The
information contained herein is not legal advice and is provided on an “as-is” basis
with no guarantees of completeness or accuracy.

Navigating surcharges can be complex. Let our experts guide you through the process. We’ll help you understand the rules, implement effective strategies, and ensure compliance. Contact us today to learn more.