Credit card surcharges, checkout fees, merchant surcharges – whatever you call them, the concept is the same: you add a fee when a customer uses a credit card. But are they legal? And more importantly, are they a good idea for your business?
To answer those questions, we’ll explore all aspects of what surcharging entails.
- What is Surcharging?
- Surcharging History
- Fast Facts on Credit Card Surcharges
- Surcharge Basics
- State-Specific Rules
- Pros and Cons of Credit Card Surcharges
- How to Get Started
- The Don’ts of Surcharging Cards
- Alternatives to Surcharging
What is Surcharging?
Simply put, credit card surcharging means adding a fee to the total transaction price when a customer pays with a credit card instead of another method. (Such as cash, check, or debit card.) The fee is a percentage of the total and subject to a cap set by the card brands. This cap can be superseded by state law.
The surcharge is added at the point of sale and increases the total amount due by the customer. For example, if your business imposes a 4% surcharge (the maximum allowed in most states), a customer purchasing a $10 item with a credit card would pay $10.40. (4% of $10 = $0.40.)
Surcharging has not always been permitted. Prior to 2013, it was prohibited by the card brands – specifically Visa and Mastercard – because the companies didn’t want to dissuade customers from using their credit cards. Visa and Mastercard have always prohibited these fees as part of their merchant agreements; Discover and American Express allowed them, but forbade businesses to surcharge their cards differently than any other brands. So, unless a business only accepted Discover and American Express, surcharges were off the table.
A 2013 class action lawsuit against Visa and Mastercard resulted in a settlement allowing businesses to charge customers a fee for using credit cards. This fee is now commonly referred to as a “merchant surcharge, “surcharge,” or “checkout fee.” The latter name has fallen out of favor but may still be seen in some locations.
In 2017, the United States Supreme Court heard a case involving the legality of surcharging in the state of New York. Lower courts had upheld the state’s ban on surcharging credit cards. However, the Supreme Court ruled that the New York law regulated speech, not business conduct, potentially making the law unconstitutional, and remanded it to the lower courts to specifically review in terms of free speech.
In 2019, the State of New York and plaintiffs reached an agreement to dismiss the case, a move that allowed New York businesses to begin surcharging, provided that businesses disclosed the fees to customers in dollars and cents.
The case was seen as a watershed moment for surcharging, with legal experts and industry insiders predicting widespread ability to surcharge in the following years.
The class action settlement and the New York case allowed businesses to reduce the impact of credit card processing fees by instead passing those costs on to consumers. However, there are many rules businesses must follow in order to charge those fees, as well as pros and cons that should be considered before deciding if surcharging is the right move.
Update, 2023: As reported by Payment Dive, in spring 2023, Visa announced that it was lowering the surcharge cap from 4% to 3% (or the actual cost of processing, whichever is lower.) Representatives for the company have referred to surcharging as “not great” for the customer experience. At the time of this update, Mastercard’s cap is still set at 4% or the actual cost of processing, whichever is lower. As the Payment Dive article notes, some question Visa’s legal authority to alter the cap, but so far no challenges have been brought in court.
Fast Facts on Credit Card Surcharges
- Surcharges are legal in most states
- Adding fees not against merchant agreements; the card brands allow surcharging.
- Surcharges are prohibited in Connecticut and Massachusetts
- States with surcharge laws being challenged in court, or states with special laws surrounding surcharging, include California, Colorado, Maine, New York, and Texas
- Where legal, surcharges are only allowed on credit cards, NOT debit cards
- Surcharges are capped at 3% (for Visa), 4% (for Mastercard) or the “actual cost of processing,” whichever is lower, except in Colorado, where the cap is 2%
- Businesses must inform customers of the surcharge before checkout
- Surcharges and cash discounts are not the same thing
**Recently, non-compliant cash discount programs have cropped up that are in violation of Visa’s surcharging rules. Read more about cash discounts (and how to determine if the program you’re considering is compliant) in our article about credit card cash discounts. **
**State laws are constantly evolving on the topic of credit card surcharges. We regularly update this article and do our best to maintain the accuracy of surcharge laws, but it’s a good idea to check with your state’s Attorney General or a business lawyer for the latest on surcharge legalities before implementing a surcharge.**
As you consider whether or not surcharging is right for your business, start by familiarizing yourself with some essential information — the difference between checkout fees (surcharges) and convenience fees, the states where surcharging is currently banned, and the procedures you must follow in order to start surcharging.
Surcharges vs. Convenience Fees
Even before the Visa & Mastercard settlement, businesses were allowed to charge their customers convenience fees for using credit cards in a very limited set of situations. These fees are meant to be used when paying with a credit card is a “bona fide” convenience over other forms of payment — for example, if the only other option for the customer would be a money order. Unlike surcharges, convenience fees are a flat amount, not a percentage.
Most transactions — including any transaction that is face-to-face, and any transaction done over the phone or online if that is the only method of payment available — fall outside the definition of a convenience fee. CardFellow has an excellent guide to convenience fees, and the rules for these have not changed.
However, a surcharge does not have to meet the requirements that a convenience fee does. Instead, it is applied to any credit card transaction as a cost of using that card. This applies to all four of the major card brands – Visa, Mastercard, Discover, and American Express.
There are limits on what merchants can charge and conditions that merchants must meet in order to surcharge credit card transactions — the next part of this article will explore these in depth.
States Where Surcharging is Banned
As of autumn 2022, there are only two states remaining where surcharging is explicitly prohibited: Connecticut and Massachusetts. If your business operates in either of those states, you may not charge credit card fees to your customers.
Several states still have anti-surcharge laws on the books, but they are being challenged in court or are currently unenforceable. Those states include California, Texas, and Utah.
On the other side of the coin, several states are considering or have pending legislation that would make surcharging illegal if passed. Those states include Hawaii, Illinois, New Jersey, and Rhode Island. Many experts believe it is unlikely that new bans on surcharges would actually go into effect due to successful court challenges to surcharging in other locations.
If you do business in multiple states, you may surcharge credit card transactions only in states where it is permitted.
Several states have their own rules (or court challenges) surrounding credit card surcharging. We’ve included information on those states and their specifics below, but be aware that the legal landscape in these states may shift quickly. It’s a good idea to consult a business attorney prior to implementing a surcharge program if you’re in a state dealing with surcharging grey area such as those listed below.
While California once prohibited surcharging, court challenges called the ban into question. In 2018, courts in the state of California ruled that the ban on surcharges was unconstitutional as it placed restrictions on business’ speech.
Jonathan Razi, Founder and CEO of payment processing company CardX and graduate of Harvard Law School, explains, “The Ninth Circuit decision means that the California surcharge ban is unconstitutional as applied to these plaintiffs and the specific pricing practice they’re looking to employ: a single sticker price with a percentage fee added when customers choose credit cards.”
Razi clarifies that the ruling does not apply to pricing that was not included in this case, such as dual-sticker pricing. But businesses that want to use the same single-sticker pricing that was challenged in this case would be able to do so in order to clearly communicate the cost of accepting credit cards.
“Part of what we see in this decision’s set of facts, which any solution that complies with the card brand rules would do, is using signage to adequately disclose the credit card surcharge. In fact, a major interest behind this First Amendment challenge is that these merchants want to communicate very clearly about the high cost of credit card acceptance. If another merchant strayed from making these clear disclosures, and instead misled or surprised customers, then they may face a legitimate enforcement of the California law. To California merchants, we’re saying that, if your pricing plan matches what these plaintiffs are doing, then this decision is authoritative and controlling.”
CardX and other processors that offer automatic surcharging in states where permitted can serve businesses in California as a result of the legal case.
However, businesses may be required to list both the credit and cash prices in dollars and cents. On its website, CardX shows examples of what this may look like, as seen below:
CardX shows an example of a shelf sticker, an invoice, and example wording in a verbal exchange that would satisfy the disclosure requirements when surcharging credit cards.
Keep in mind that California has laws that still apply regarding deceptive pricing, so you may want to consult an attorney if you’re considering imposing a credit card surcharge on a business operating in California to ensure you comply with the recent decision and all applicable laws.
While Colorado does allow surcharging, it has a more restrictive cap on the fees a business can charge. Colorado businesses can only add a fee up to 2% or the actual cost of processing, whichever is lower.
Like other states, New Jersey allows surcharging, but as of August 2023, it caps the surcharge to limit profiting from it. The law states that businesses must post notices about the surcharge and caps the surcharge at the cost of processing the transaction. Technically, according to Visa and Mastercard rules, businesses should already be limiting the surcharge to their actual cost of processing (or not more than 3% for Visa or 4% for Mastercard.) This law simply enforces that and gives the state of New Jersey the ability to pursue action against businesses that profit from surcharges.
The New York challenge regarding surcharges was one of the more well-publicized, in part due to its escalation. In 2017, the Supreme Court heard a case regarding the legality of surcharging in the state of New York. Lower courts had upheld New York’s ban on surcharging credit cards. The case, Expressions Hair Design v. Schneiderman, was heard in January of that year, with the SCOTUS weighing in during early April.
The Supreme Court stated that the New York law regulates speech, not business conduct, which could potentially make the law unconstitutional. The Supreme Court remanded the case to lower courts, who reviewed it specifically in terms of free speech.
In early January 2019, the State of New York and the plaintiffs reached an agreement to dismiss the case. Dismissal allowed New York businesses to pass credit card fees to customers provided that business makes a disclosure to the consumer showing the credit price in dollars and cents.
Razi, who authored CardX’s amicus brief in the Expressions Hair Design Supreme Court case, explains that he, “Expect[s] the New York law will survive, but in a far narrower form—and ‘no surcharge’ will simply mean ‘no surprise.’ Now, New York merchants are allowed to pass on their credit card fees so long as they make the required consumer disclosure.”
Like New York and California, Maine allows surcharging but requires specific disclosure. If you’re a Maine business and looking to surcharge, you’ll need to post the cost for both paying with cash and paying with a credit card so that customers are clear on their actual cost for an item.
As of 2018, Texas businesses can surcharge in most cases. In Rowell v. Paxton, the court determined that surcharging is considered protected speech under the First Amendment. Thus, the Court ruled Texas’ “no surcharge” law unconstitutional. However, there may be instances where surcharging is still not permissible.
The Texas State Law Library, a government website that serves the research needs of the Texas Supreme Court, Attorney General, and other legal agencies, has a page dedicated to the question of surcharging, but as of this update, it states that the question is complex.
It goes on to explain that surcharging may still be against the law in some instances. It references the 2018 Rowell v. Paxton case, where the ban on surcharging was deemed unconstitutional. However, the page then cites an opinion provided by the Attorney General in 2019 stating that the law is still enforceable in certain situations. The AG states:
“When a court determines that a statute is unconstitutional as applied, it normally invalidates the statute only as applied to the litigant in question and does not render the statute unenforceable with regard to other litigants or different factual circumstances. […] Thus, circumstances may still exist where, as applied, section 604A.0021 operates to prohibit a credit card surcharge fee.”
In this statement, the Attorney General is explaining that the court decision only applies to the party involved in the court case and that it does not mean the state ban on surcharges can never be enforced in other situations.
If you’re running a business in Texas and are considering surcharging, be sure to check with a licensed attorney in your state or consider a compliant cash discount program rather than a surcharge.
Pros and Cons of Credit Card Surcharges
Deciding to surcharge isn’t easy – there are pros and cons to doing so and you should carefully weigh the costs and benefits for your business.
The benefits are fairly straightforward:
- Surcharging can help your bottom line
It’s unlikely you’ll be able to completely eliminate your credit card processing costs by surcharging, but you can defray a large portion of them. A “heads up” – several industry insiders have predicted that processors will charge businesses the usual rate for any checkout fees added to transactions, so be aware that businesses that surcharge could actually see higher processing costs.
- If processing costs are built in to your prices, it’s possible that surcharging will allow you to lower prices across the board. This, in turn, could make your business more competitive, especially if most of your customers pay with cash, check, or debit cards.
However, surcharging comes with several disadvantages that make it less appealing in some cases. Many large retail chains (including giants such as Home Depot and Walmart) have gone on record stating that they have no plans to start adding checkout fees, as they believe that doing so would drive away customers. You might consider NOT surcharging if:
- Most of your customers use credit cards.
Remember the principles of supply and demand – if you add a few percent to each transaction, customers who shop with credit cards may buy less. In addition, studies have repeatedly shown that consumers spend more with credit cards than with cash. Even if your customers switch, it’s very possible that they will spend less if they feel limited to the cash they carry in their wallet.
- It’s easy to find alternatives to your business nearby.
If a consumer can get a similar product or service for the same price across the street, and that business doesn’t surcharge, why would they go to the one who does?
- Your typical transactions are high dollar amounts.
Consumers likely won’t flinch over 3% added to a pack of gum; 3% added to the price of a TV is a different story. The more your goods or services cost, the more likely a surcharge will cause them to buy less – or not purchase from you at all.
- You serve consumers who are particularly averse to surcharges.
See our infographic on surcharging for more details on consumer opinions of credit card surcharging.
Before deciding whether or not to surcharge, consider those fees through the eyes of your customers and carefully consider whether those fees will make up for any loss in revenue.
How to Get Started
If you’re allowed by state law to charge a fee for using a credit card and you’ve decided it’s the right move for your business, here’s the process to get started:
- Notify the card brands you accept of your intent to surcharge.
Visa and MasterCard each have a form that businesses must fill out. This is Visa’s surcharge form. Mastercard provides information about disclosing intent to surcharge in their surcharging FAQ. Each brand requires 30 days notice before you may begin charging checkout fees.
- Inform your acquiring bank of your intent to surcharge.
Different banks have different procedures; most require 30 days’ notice as well. Your merchant service provider will likely be able to tell you what needs to be done to meet this requirement.?
- Decide what to surcharge.
You can choose whether you want to charge for only specific types of cards (such as rewards cards, which tend to carry higher costs for businesses) or for all cards issued under a brand. You must choose one or the other — you cannot charge a fee for all cards and an additional fee for card products which have higher processing costs.
- Both Visa and Mastercard require businesses to post a sign both at the main entrances to their business and at all points of sale notifying customers that their credit card purchases will be subject to checkout fees. The signs on entrances need to inform customers that you charge fees, while the point of sale signs must disclose the percentage that will be added to the transaction. Visa provides signage that you can print out and use.
- Online businesses have to let customers know about checkout fees on the first page of their website that references card brands
- Checkout fees need to appear as a separate item on receipts. In many cases, your merchant service provider will need to program your point of sale terminals to meet this requirement. Contact them with questions.
The “Don’ts” of Surcharging Cards
Both the court settlement and the card brands have outlined specific limits on surcharging in order to protect consumers. If you decide to surcharge, protect yourself from costly chargebacks or sanctions from your acquiring bank and the card brands by remembering the following:
- Don’t charge a fee greater than your actual credit card processing cost.
Visa and Mastercard base this on whatever your merchant discount rate was in the last quarter.
- Don’t charge a fee higher than 4% of the transaction for Mastercard or 3% for Visa.
This limit is outlined in the surcharging settlement.
- Don’t surcharge debit cards or prepaid cards.
These forms of payment are specifically excluded from the settlement. You cannot surcharge a debit card, even if it’s “run as credit.”
- Don’t forget to let your customers know that you charge credit card fees.
The exact requirements set forth by the card brands are outlined earlier in this article. Your customers should always know what forms of payment you surcharge, as well as how much your surcharge, before they use their card.
- Don’t keep surcharge fees when refunding customers.
When issuing refunds, you must also refund any surcharges – even for partial refunds. For example, if you refund 50% of a customer’s purchase, you need to refund 50% of the surcharge you collected.
Alternatives to Surcharging
Not sure that surcharging is the right answer? Consider these alternatives:
- Offer a cash discount
While it sounds – and is – similar, a cash discount is an option to “reward” customers who pay with cash rather than “penalizing” credit card customers with an added fee. You are allowed to offer a cash discount to customers that don’t pay with plastic. Many gas stations, for example, already engage in this practice.
- Impose a minimum purchase amount
Businesses are allowed to set a minimum purchase up to $10 for credit card transactions. Setting a $10 minimum ensures a higher transaction amount, making it more worthwhile to eat the cost of credit card processing.
Note: You cannot impose minimums on debit card transactions.
Have you implemented credit card surcharges at your business? What do your customers think? Let us know in the comments!