Frequently Asked Questions about Surcharging Credit Cards with Visa

A key development in the payment method is the acceptance of credit card payments. Initially, many merchants resisted this due to high processing fees. Over time, however, they recognized that not accepting credit cards could mean missing out on substantial revenue opportunities. In response to the need to offer preferred payment methods, many business owners are adopting credit card surcharging despite the associated fees. This approach transfers the processing costs to customers who pay with credit cards.

Today, we’ll explore some frequently asked questions about credit card surcharging, particularly with Visa. We’ll cover what credit card surcharging involves, why it’s significant, how surcharging is implemented, and its effects on consumer behavior, among other topics.

What Is a Credit Card Surcharge?

A credit card surcharge is an extra fee added to the total purchase amount when a customer uses a credit card for payment. This fee is applied at the point of sale and varies based on the transaction amount and the limits established by credit card companies.

Are There Legal Restrictions on Surcharging Credit Cards in My State?

As of April 2024, surcharging credit cards is permitted in nearly all states, yet businesses must adhere to specific guidelines for implementing these fees. Surcharge regulations differ from state to state, and each credit card brand has rules that merchants must comply with. However, credit card surcharging remains illegal in some regions, including Maine, Connecticut, New York, Puerto Rico, and Massachusetts.

How Can Merchants Legally Add a Surcharge to Credit Card Transactions?

Merchants are permitted to add a surcharge to credit card transactions, provided they adhere to the following guidelines:

• Notify Credit Card Institutions: Merchants must inform major credit card institutions in writing before they begin applying surcharges.
• Disclose Fees: It is essential to disclose any surcharges before a transaction occurs. This can be achieved by displaying signs at the cash register or point of sale or by listing the surcharges on a website.
• List on Receipts: Surcharges should be itemized on the receipt, showing both the percentage and the dollar amount.
• Limit Surcharges: The surcharge must not exceed the cost of accepting the card or 4%, whichever is lower, and merchants cannot profit from the surcharge.
• Avoid Convenience Fees: Merchants are not allowed to impose convenience fees or service charges in addition to the surcharge.

What Factors Should Merchants Consider When Deciding To Apply a Surcharge on Card Transactions?

When deciding whether to apply a surcharge on card transactions, U.S. merchants should take several factors into account, including:

• Competitor Practices: Assess what similar businesses in your industry are doing regarding surcharges.
• Cost Comparisons: Evaluate the costs of accepting credit cards versus other payment methods.
• Disclosure Requirements: Understand the information you must disclose to your customers about the surcharge.
• Customer Experience: Consider how a surcharge might affect your customers’ perceptions and their overall shopping experience.

Can You Profit from Surcharging?

Surcharging is not designed to generate profit. Its purpose is to offset the actual costs incurred from processing credit card transactions. For instance, a 3% surcharge cap typically reflects the average cost of credit card fees. Charging above this limit is not advisable, as it can lead to penalties and fines from the card brands.

What Are the Rules for Applying Surcharges to Visa Credit Cards Specifically?

Visa shares several regulations with Mastercard concerning the application of surcharges on credit card transactions. Merchants are required to provide the card network and payment processor with 30 days written notice before they begin applying surcharges. The surcharge amount is restricted to the actual cost of processing the credit card and cannot exceed 3% of the transaction value for Visa cards.

Additionally, surcharges must be prominently displayed both at the entrance of the business and at the point of sale. They also need to be itemized on receipts, showing both the percentage and the dollar amount. It is important to note that the purpose of surcharges is to cover the costs associated with processing credit card payments and not to generate profit.

What Is the Maximum Allowable Amount for Credit Card Surcharges?

To ensure compliance, merchants need to be aware of surcharge limits. In the United States, merchants can apply a surcharge to credit card transactions as long as it does not surpass the merchant discount rate for the specific credit card used. Additionally, surcharges must not exceed 4%.

Do Surcharge Rules Differ by Type of Visa Card, Such as Credit Versus Debit Cards?

Visa prohibits all U.S. merchants from applying surcharges to prepaid and debit card transactions (the same goes for MasterCard). This means that you cannot add a credit card surcharge to purchases made with a debit or prepaid card. This policy is strictly enforced without exceptions.

What Are the Consequences of Not Complying with Visa’s Surcharge Rules?

Acquirers of merchants found in violation of Visa’s rules may face potential fines. Specifically, if a merchant is identified as improperly surcharging, their acquirer may be subject to an immediate fine of US $1,000.

Can I Apply for a Surcharge by Processing Debit Card-Not-Present Transactions?

Processing debit and prepaid cards as “credit”—whether with a PIN or not—does not alter their classification as debit and prepaid cards. Consequently, applying a surcharge to these types of cards remains non-compliant. U.S. merchants are prohibited from surcharging on debit and prepaid cards, regardless of the processing method.

Do I Need to Inform My Customers About Surcharging?

Yes, if you choose to implement a surcharge, it is mandatory to notify your customers. The surcharge amount must be clearly indicated on every receipt, which requires specific programming. Additionally, if your business applies surcharges, you must display relevant information at both the point-of-entry and the point-of-sale (POS) of your business. Examples of surcharge signage can be viewed here.

Can You Apply a Surcharge to International Cards?

No. The settlement agreement affects Visa’s rules concerning the surcharging of credit card purchases only within the U.S. and U.S. territories. Surcharging on transactions outside the U.S. is still prohibited unless local laws or regulations specifically allow merchants to implement such charges.

What Is the Difference Between a Surcharge and a Convenience Fee?

A surcharge is a fee added by a merchant to a transaction to cover the costs associated with processing a credit card payment. It’s generally a percentage of the transaction amount and is applied to all transactions except those made with cash. Surcharges can vary between different merchants.

On the other hand, a convenience fee is an extra charge for the option to use a specific payment method, typically for transactions conducted remotely, such as online or over the phone. This fee compensates for the convenience provided to the customer by these alternative payment methods.

Simply put, while a surcharge compensates the merchant for the cost of credit card transactions primarily in in-person settings, a convenience fee is linked to the ease of remote transaction methods.

Can Surcharges Be Applied to Both Brand-Level and Product-Level Visa Cards?

No, merchants in the U.S. are not permitted to apply surcharges to both brand-level and product-level Visa cards simultaneously. U.S. merchants have the choice to add a surcharge at the “brand level” across all Visa credit card transactions or at the “product level” for specific types of Visa credit cards (e.g., Visa Traditional, Visa Traditional Rewards, Visa Signature), but they cannot do both.

How Does Surcharging Affect Customer Behavior and Loyalty?

Businesses must carefully manage the use of surcharges, balancing the need to offset costs with maintaining customer satisfaction. Implementing excessive surcharges on credit card payments can reduce transaction fees, but it may also jeopardize customer happiness and loyalty. Customers might perceive surcharges as a penalty for using their preferred payment method, leading to potential dissatisfaction.

Plus, surcharges can increase price sensitivity among consumers, prompting them to favor businesses that do not impose these additional fees. They can also discourage customer loyalty, especially among those who use credit cards for convenience and rewards, as these customers might be less inclined to patronize businesses that enforce surcharges.

What Are Some Alternatives to Surcharging for Covering Credit Card Processing Fees?

The practice of adding a surcharge to credit card transactions comes with both advantages and drawbacks. While it helps cover processing fees, it also has potential downsides. Consequently, businesses may consider different strategies to manage credit card processing costs effectively.

Here are a few such alternatives:

• Minimum Purchase Requirements

Businesses might enforce a minimum purchase limit for credit card use. This strategy helps absorb the processing costs by ensuring transactions reach a specific monetary threshold, allowing companies to accept credit cards without bearing excessive fees.

• Cash Discounts

Offering discounts for cash payments is a widely adopted alternative. Cash discounts motivate customers to pay in cash, help businesses evade credit card fees, and provide a cost-saving incentive for consumers.

• Alternative Payment Platforms

Adopting different payment processing platforms is another effective strategy. These platforms often feature reduced fees or flat-rate pricing, which can be more economical for businesses. They may also offer added functionalities and benefits that improve the payment process.

• Convenience Fees

Some companies opt to apply convenience fees instead of surcharges. These fees are usually charged when customers use credit cards for specific services or transactions. Transparent communication of these fees can help businesses cover processing costs while ensuring clarity for customers.

• ACH and eChecks Payments

Automated Clearing House (ACH) and Electronic checks (eChecks) payments provide another viable alternative to surcharging. These methods generally come with lower processing fees than credit cards, making them appealing for business use.

• Digital Wallets

Encouraging digital wallets is an effective option as these technologies gain popularity. Digital wallets offer enhanced convenience and security and tend to reduce merchants’ processing costs.

Do Credit Card Refunds Need to Include the Surcharge Amount?

Yes, for any returns, merchants are required to refund the entire transaction amount, including the surcharge fee.

What Documentation Is Required to Implement Surcharging?

Before you start surcharging, you must inform Visa at least 30 days in advance. Review your contract’s terms and conditions to confirm that surcharging is permitted. Transparency is key—disclose any surcharges at the point of sale and detail them on the customer’s receipt.

Is It Possible to Surcharge Visa Credit Cards and Not Others?

Yes, you can choose to surcharge Visa credit cards exclusively. However, if you do so, you must apply the surcharge under the same terms and conditions as you would for any other card brand that has equal or higher processing costs and imposes restrictions on surcharging.

How Do Surcharging Practices Need to Be Adjusted in Multi-State Operations?

In multi-state operations, merchants face a complex interplay of state laws and Visa’s specific regulations. And if surcharging is prohibited for a merchant in one state, Visa’s rules still permit the merchant to apply surcharges in other states where the practice is allowed.

Are Surcharges Taxable Under State or Federal Law?

Yes, credit card surcharges are generally taxable. The taxation of credit card surcharges varies by state but is common in places like Michigan and Minnesota. In Michigan, for example, the surcharge added to a credit card purchase to cover the fee paid to a payment processor is included in the sales price and is, therefore, subject to sales tax.

How Should Credit Card Surcharges Be Calculated?

Compliance is crucial when adding credit card surcharges. The calculation process isn’t as straightforward as adding a percentage like 2%. Much like with sales tax, various rules and regulations from federal and state governments and card brand networks must be adhered to. A key principle is that surcharges cannot be a source of profit; they should only recover the cost incurred from accepting a credit card, typically ranging from 1.5% to 4%.

There are two methods to calculate credit card surcharges:

• Variable Surcharge: Also known as dynamic surcharging, this approach adjusts the surcharge percentage based on the actual processing costs of each transaction, providing more precise cost recovery.
• Fixed Surcharge: This method applies a consistent percentage to all transactions.

Does Surcharging Differ Between Online and In-Store Transactions?

Typically, no. Card-present (CP) and card-not-present (CNP) transactions, such as those made through drive-thrus, online, or over the phone, can include surcharges. It’s crucial that surcharges are clearly disclosed and/or appropriate signage is provided before the transaction is completed.

How Can I Stay Updated on Surcharging Regulations?

To keep up with surcharging regulations, consider the following steps:

• Subscribe to communications from Visa and other card brands.
• Regularly visit the Visa and other card brands’ websites at least once every quarter.
• Consistently review the rules and regulations provided by these card brands.