Most B2B (business to business) prefer to pay using credit cards because of its convenience, the cash flow benefits of delaying payments, and the opportunity to take advantage of rewards.
However, merchants don’t share the same sentiments. Receiving credit card payments for their business costs them a lot of money, especially with credit cards processing platforms like MasterCard and Visa constantly increasing their fees.
However, with online commerce gaining popularity, merchants have no choice but to accept credit cards. There are a few ways merchants can cushion their business to cover credit card processing fees, either by increasing their prices, offering cash discounts, or adding a convenience or surcharge fee.
Today’s guide delves into what surcharging is, is it legal, and whether it is right for your business.
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What is credit card surcharging?
Credit card surcharging charges customers a fee to try and offset credit card processing fees. For example, if an item is $100 and the fee to process this payment is, let’s say, $2.60, then you charge the customer $102.60.
Credit card schemes charge merchants about 1.3% – 3.5% of every transaction to process credit card payments. However, this doesn’t include the additional fees merchants have to pay to their payment processor, which may depend on which they’ve decided upon, whether tiered, interchange plus, or a flat rate.
With credit card payments being a necessity in the increasingly digital marketplace, finding ways to reduce processing fees is a top priority for most merchants.
Other than adding a surcharging fee, merchants may use another method to recover some of the processing credit card fees by introducing a convenience fee. While surcharging fee is calculated based on the percentage of the customer’s transaction, convenience is usually a fixed rate.
Same as surcharges, the rules for convenient fees vary depending on the credit card network. For example, Visa allows merchants to charge convenience fees for non-standard payments. It means that merchants can charge a fee to accept payment methods that generally differ from what they usually accept, for example, when paying online other than in-store or in person. Other credit card schemes only allow select businesses and government agencies to add a convenience fee.
Merchants can impose a minimum purchase amount to accept credit card payments so long as it doesn’t surpass $10; however, they can’t place a maximum purchase amount for credit card transactions.
Some merchants will offer discounts for their customers if they pay with cash or debit. Cash discounts are legal everywhere in the United States, while convenient fees and surcharges are not legal in all states.
Is credit card surcharging legal?
Until 2013 when a class-action suit was filed by merchants complaining about major card companies charging outrageous fees, credit card surcharging wasn’t allowed in the United States.
Now surcharging is allowed in most states. The states that don’t allow surcharging are Connecticut, Colorado, Maine, Kansas, Massachusetts, and Oklahoma. New York and California have specific laws limiting credit card surcharging, but they are currently not enforceable.
Credit card surcharging is not allowed in other countries except for Mexico, Australia, and New Zealand.
If you operate your business in multiple states in the US where surcharging laws vary, ensure you only apply the surcharge fees in the states where it is allowed. Each state has its rules regulating surcharges, so it’s essential to learn the state requirements of each location you intend to include a surcharge.
The rules for credit card surcharging.
Surcharging may be permitted in most states in the US, but there are rules around the practice that merchants need to be aware of.
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You must ensure your customers are aware of the surcharge. It must be properly disclosed.
It’s essential to properly disclose the amount and presence of a surcharge to your customers at the point of sale. If you run a brick-and-mortar store, ensure there is signage indicating that. If you have an eCommerce store, you can have the information included on the checkout page so that your customers are aware when paying using credit cards.
If collecting on accents receivable, indicate the existence and the amount of the surcharge wherever you are directing your customers to pay, such as an online payment portal. The message should be clear before the customer fills in their card details for payment.
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You should also indicate the surcharge as a line item on your customer’s receipts and in your accounting software.
Before implementing a credit card surcharge, you must notify your merchant service provider and your card brand.
If you intend to start surcharging your customers, notify your merchant’s service provider and your credit card networks in advance.
For all card networks except American express, the notice should be in writing at least 30 days before you start implementing surcharging.
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You can’t surcharge debit or prepaid cards.
The surcharge can’t be applied to payments made with a debit card or prepaid card. The processing fees for debit payments are calculated differently and are less costly to merchants than credit card payments.
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You can’t profit from surcharging.
The cost of surcharging cannot exceed 4% of the price of your transaction. The rule aims to ensure merchants don’t profit from surcharging fees. It is only used to cushion their margins by reducing credit card processing fees.
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You must surcharge the product level or card brand
MasterCard and Visa state that you can only apply the surcharge either at the product level or brand level and not both.
A brand-level surcharge means that you are applying the surcharge in the same amount for all cards from the card network. On the other hand, a product level means you apply the surcharge to a specific type of card from a network, whether a rewards card, traditional card, etc.
Is credit surcharging right for your business?
If you are on the fence on whether to implement a surcharge, you should ask yourself If your business is in a competitive market. it is unwise to a surcharge if your customer doesn’t want to pay the surcharge fee because they will take their business elsewhere
If credit card payments only fall under a small percentage of your overall business income, surcharging is unnecessary. Would your customers be open to a surcharge, or will you lose them? If your business is working with narrow margins, a surcharge will work. These are just a few questions you should ask yourself before implementing a surcharge.
