The high cost of credit card processing is a point of contention globally. No one likes credit card fees. In the US, surcharging has been fought in court and card issuers (in some states) have had to be flexible.

And while these efforts won’t lead to lower credit card fees, small business owners now have the option to offset those fees through surcharging programs. 

Most state laws in 2023 allow merchants to pass credit card fees to customers. In this article, we will discuss a few ways to do this, the pros and cons, and where it’s legal. 

Let’s get started.

How to Pass on Credit Card Fees to Customers Legally

There are a few ways of legally passing on credit card fees to customers. Some are direct, and some are indirect. Adding a surcharge to cover the credit card fee is the more direct method while incentivizing cash payments is indirect.

The four most common ways to pass on or evade processing costs are:

1. Cash discounting

With cash discounting, all products in the store are initially marked up to reflect credit card prices. This means that the fees are already included in the prices of the products. However, customers who choose to pay in cash receive a discount at the point of sale. 

Let’s say a merchant sets all prices in their store as credit card prices. In that case, a product that costs $10 will be priced at $10.35. If a customer decides to pay in cash, they can receive a discount of $0.35, reducing the price to $10.

The discount, in this case, is not huge. As such, this method doesn’t work for all merchants. It’s extremely common at gas stations, for example. But it may not be as well suited to a high-end retailer.

2. Minimum purchase requirement

Some businesses choose to impose a minimum purchase requirement to offset credit card costs. This is because when a merchant accepts a credit card payment, they have to pay a processing fee to the credit card company. 

This fee is usually a percentage of the transaction amount, which can add up fast, especially for small purchases. So, to make sure they don’t lose money on these small transactions (i.e., to make these transactions “worth” the credit card cost), some merchants set a minimum purchase requirement for customers who opt to pay via credit card. 

Unlike cash discounting, this method doesn’t impact the bottom line.

3. Credit card surcharging

Surcharging is the most hotly debated option on the list. Merchants have been fighting for it for decades. Credit card issuers—Mastercard, Visa, American Express, and Discover—have been fighting against it.

To surcharge a credit card transaction, the merchant adds an extra fee to the transaction amount when a customer pays with a credit card. 

Suppose a retailer chooses to add a 3% surcharge to all credit card transactions. 

In this case, if a customer buys a $10 product and pays with a credit card, they will have to pay an additional $0.30 as a surcharge, making the total amount to be $10.30.

Unlike the two previous options, this one is pre-programmed at the point of sale. The merchant account is programmed to add a surcharge automatically. So if a customer buys a coffee from a surcharging cafe via a credit card transaction, the surcharge fee is automatically added as a line item to the final amount when they select “credit card” as their payment method.

Just note that depending on your state and credit card processor, there are some nuances for how the surcharging process should be implemented. To ensure you stay compliant, work with a provider like CardX, which provides an easy solution for merchants to pass on these fees to customers who choose to pay with credit cards while staying within the bounds of applicable laws and regulations.

CardX offers a range of payment processing services for businesses, including eCommerce, in-person, and mobile payments. The company also offers a suite of tools to help merchants manage their payments and comply with applicable laws and regulations.

4. Convenience fee

Convenience fees are an option that may be available when customers pay via “alternative” methods. Over-the-phone transactions may attract a convenience fee if they’re otherwise typically purchased in person. Most people will have seen convenience fees attached to online ticket sales for concerts or movies.

These fees represent charges that merchants impose on customers for the convenience of using a particular payment method or service. One key difference between convenience fees vs surcharging is that the former are typically fixed and not based on a percentage of the transaction amount.

As it’s only for special “alternative” transactions, it doesn’t cover all credit card transactions, but it helps offset some.

Passing on Credit Card Fees to Customers: The Pros and Cons

As of 2023, cards are the favorite payment method for North Americans. Cash makes up less than 20% of all spending. Even then, its primary use is for purchases under $25.

Having no card processing option is really not an option. So let’s instead look at the pros and cons of passing credit card fees onto customers.

Pros of passing on credit card fees to customers

Flexibility. These options give flexibility to merchants with small businesses that simply can’t absorb extra fees.

Automatic (when set up properly). In the case of surcharging, the benefit is that everything is automatic. When using a solution like CardX, the processing fees are passed on with no manual work on the merchant’s side. If the customer doesn’t want to be surcharged, they can pay instead with a debit card or cash.

Cons of passing on credit card fees to customers

Lower customer satisfaction. Customers may feel annoyed or frustrated if they are charged an additional fee for using their credit card, especially if they are not used to it or if the fee is unexpected. Some customers may opt to shop elsewhere if they’re required to pay additional fees. 

It’s important to remember that surcharging tends to work better in certain industries than others. 

Some retail businesses, for instance, use surcharging if they have low profit margins. Meanwhile, airlines, hotels, and rental car companies may impose surcharges on customers who pay with credit cards, as they often have high transaction volumes and face significant processing fees. 

Many non-profit organizations do not impose surcharges on credit card transactions, as it can be seen as discouraging donations. Similarly, schools and universities typically do not impose surcharges on credit card transactions, as it can be seen as adding an unnecessary burden to students and families. 

May add complexity. Surcharging isn’t always easy to set up. Your credit card machines need to be specially programmed to add surcharges. 

Not always legal. There are state and federal laws to navigate, and credit card networks enforce disclosure. Merchants have to take extra steps, including putting up signage in-store to notify customers of surcharging.

Best Practices of Passing Fees on to Customers

To implement these practices without disruptions or complaints, it’s important to do the following:

Be honest

In the case of surcharging, it is a legal requirement that signage is installed in-store to notify customers. These signs come from credit card companies and must be displayed at the entry and terminal.

Merchants should apply the same transparency for cash discounting, minimum spending, and convenience fees. Put up signage so that customers aren’t surprised at the register.

Provide options

Let customers know what options they have when they go to pay. Tell them if cash discounting is available or if debit cards are accepted. With options on the table, customers won’t feel forced into taking the fees. It will help them empathize and understand why these options are there. 

Follow the rules

Convenience fees and surcharging are policed by credit card issuers and protected by state laws. Customers can report merchants to the State’s Attorney General; and in some states, merchants that implement surcharging illegally may get fined. The easiest way to stay out of trouble is to follow the rules.

Never charge above the surcharging limits. Always have the signs up. Do not charge customers surcharges or convenience fees when it is not allowed.

Reduce the Burden of Fees

Credit card processing fees are unavoidable. It may not always matter to the card issuer who pays, as long as someone does. What’s more, there are merchant account fees to be paid.

With no real way to eliminate the interchange fees, merchant services provider fees are where merchants can really save. Look for providers like Payment Depot that charge no hidden fees, no markups, and offer transparent pricing.

Membership-based pricing can drastically reduce the per-transaction fees for small businesses with high-volume sales. Payment Depot offers monthly membership-based wholesale rates that let merchants save money as they process more transactions. Contact us today to learn more.

FAQs

As surcharging rules differ across the US, some common questions should be addressed.

Are credit card surcharges legal?

Yes, surcharging is legal in a lot of states. In 2023, most states allow some form of surcharging. Massachusetts, Connecticut, and Puerto Rico are the only states/territories that have a complete ban on the practice. 

Which states/territories don’t allow surcharges?

As of 2023, Connecticut, Massachusetts, and Puerto Rico do not allow surcharging. 

Meanwhile, the following states have certain laws that limit the ability of merchants to implement surcharging: California, Florida, Kansas, Maine, New York, Oklahoma, Texas, and Utah.

Do surcharges apply to debit cards?

No. Surcharges cannot be applied to debit cards; they can only be added for credit card processing. All debit cards will attract debit card processing fees payable by the merchant.

When the merchant services account gets programmed for surcharging, it automatically recognizes the cards. There is no way around it. Even if a cashier selects “credit card” on the machine, it will recognize a debit card and process the payment accordingly.

How do surcharges differ from convenience fees?

Surcharges are automatic. It’s pre-programmed on the terminal and applied to every credit card transaction.

Convenience fees are manually added by the merchant. They can be added to debit card transactions and credit card transactions. But they are only applicable for “alternative” payments.

A retailer cannot charge convenience fees to accept card payments in-person, for example. However, the retailer may be able to charge a convenience fee if a customer is paying over the phone. Convenience fees are always flat fees. Not percentages.

Check Visa, Mastercard, and American Express policies to learn what is applicable under each card issuer. This can also differ from state to state.