A Complete Guide To Credit Card Surcharges
Back in 2013, a massive class action lawsuit was filed against Visa and Mastercard by independent businesses stating they were being charged astronomical fees that they couldn’t fight against due to restrictions put on them by the card networks. They weren’t allowed to pass along those fees or point their customers to less expensive options.
Eventually, Visa and Mastercard reached a settlement allowing independent businesses to add a surcharge to credit only transactions through Visa and Mastercard.
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Our mission at Gravity Payments is to put power back into the hands of small business owners who are often taken advantage of by the financial services industry. We don’t think that’s fair, so, here’s a guide on best practices and frequently asked questions when it comes to passing along surcharges at your business.
WHAT IS SURCHARGING?
Surcharging is merely the practice of adding on a small fee to a transaction. This simply means a charge to cover a merchant’s cost for processing a credit card transaction. A great example of how this practice is done is when you’re purchasing something from a business and you need a specific minimum amount in order to use a credit card. Otherwise, they request that you use cash only.
IS SURCHARGING LEGAL IN ALL STATES?
Currently, there are only four states that have bans on credit card surcharging. They believe it is unfair to the consumer to have to absorb a processing costs. Those four states include Connecticut, Oklahoma, Maine, Massachusetts.
If you run a business in one of the above states, you CANNOT impose a surcharge on your customers. There are other ways around it. You can offer a discount to customers who want to pay by cash or check.
WHAT TYPES OF PAYMENT CAN I IMPOSE A SURCHARGE ON?
The ONLY form of payment you can impose a surcharge on is a credit card. You CANNOT impose a surcharge on any debit or prepaid cards.
WHAT IS REQUIRED OF MY BUSINESS TO IMPOSE A SURCHARGE?
The first thing you’ll need to do is look at which cards your business accepts. There are different requirements per card network. Next, you’ll need to let your credit card processor and any relevant card networks (Visa, Mastercard, etc.) know that you plan on providing a surcharge. Finally, you’ll need to make sure you have a point-of-sale system capable of recording any surcharges in your system, because you’ll need to report them.
WHAT ARE THE GUIDELINES FOR BUSINESSES WHO WANT TO ADD SURCHARGES?
Each card company has their own guidelines. They are very strict on making sure businesses are not discouraging their customers from using another payment method other than cards. Here are some of the most basic guidelines for each card network (Visa, Mastercard, Discover, American Express):
- There are limits on the surcharge amount.
- You must post appropriate notice inside your store.
- You need to include the surcharge amount on the receipt as a separate line item in the network authorization request and in settlement. You need a POS capable of supporting this feature.
- You can choose to apply brand-level surcharges or product-level surcharges, but you can’t do both.
- You must notify the card company and your credit card processor in writing at least 30 days in advance.
Here are some more resources per card network:
- Visa Surcharging FAQ
- Visa Small Business Resource Center: Regulations and Fees
- MasterCard Surcharging Rules
- American Express Merchant Reference Guide
WHAT’S THE MAXIMUM SURCHARGE ALLOWED?
You can apply a fee up to a maximum of 3%. If your processing effective rate is above 3%, you CANNOT charge anything above that. You also cannot assess a high surcharge for one card network over another. For example, if you charge a 3% surcharge for using American Express, you can not charge a 2% surcharge for using Visa.
WHAT’S THE APPROPRIATE WAY TO LET MY CUSTOMERS KNOW ABOUT SURCHARGES?
The card companies clearly specify that you must post a notice at the entry to your business AND by your point-of-sale system letting them know about the surcharge. You also must include the rate you’re charging and that it won’t exceed your own processing fees.
HOW DO I APPROPRIATELY RECORD MY SURCHARGES?
You must have a POS capable of including a surcharge as a line item which you’ll need to report back to your credit card processor and card network. If you’re using a POS system such as Square or PayPal, you CANNOT assess a surcharge. They strictly prohibit it in their terms of agreement.
WHAT’S THE DIFFERENCE BETWEEN BRAND-LEVEL SURCHARGES AND PRODUCT-LEVEL SURCHARGES?
If you accept American Express and Discover cards, you should implement brand-level surcharges in order to protect yourself. If you only accept Visa and Mastercard, you’ll have a lot more flexibility with whatever route you’d like to go.
The rules for brand-level surcharges are:
- The surcharge must be the same for all credit card transactions of that brand, regardless of issuer.
- The surcharge must be no greater than the merchant’s average discount rate for that brand’s credit card transactions.
- The surcharge cannot exceed 3% in any event.
The rules for product-level surcharges are:
- The surcharge must be the same for all transactions of that particular product, regardless of the card’s issuer.
- The surcharge must be no greater than the merchant’s average discount rate for credit card transactions of that particular product.
- The surcharge cannot exceed 3% in any event.
HOW DO I NOTIFY MY CREDIT CARD PROCESSOR AND THE CREDIT CARD COMPANIES?
The best thing you can do is reach out to your account representative and ask what the best way to proceed is, but, no matter what, you’ll have to provide written notice. You cannot call or email.
SO, SHOULD YOU ADD A CREDIT CARD SURCHARGE?
It really comes down to your customers. If you implement a surcharge, it comes at the risk of losing money from customers who are put off by additional charges to their credit card. So, you’ll have to decide if you have the type of customers who don’t mind paying a little extra.
For a bit more information to help you make your decision, when consumers were asked how much extra they would pay to use a credit card at a business, the majority said they wouldn’t pay an extra fee (64.5%). The next group (17.9%) would pay a one dollar extra or less. Additionally, credit cards are used the most in online shopping and department store purchases, while used the least at fast/casual dining restaurants.
Another thing you’ll have to figure out is if your point-of-sale system supports the features necessary to add surcharges as a line item and to report back to your credit card processing company. If not, you’ll have to shop around for a new POS system. Just make sure the cost of a new system doesn’t negate what you’d save by passing on a charge to your customers.
Finally, if your fees are going to be high, it might be time to look for a new processor. If you’re already a Gravity client, let us know how we can help you when it comes to surcharges. If you’re not a client but interested in how we can support your business, contact us today!
It’s our mission to reduce the costs and headaches associated with credit card processing, so we’d be honored to earn your business.