A 2013 class action lawsuit against Visa and Mastercard resulted in a settlement that allows businesses to charge their customers a fee for using credit cards — commonly referred to as “merchant surcharges” or “checkout fees.”
The settlement will allow businesses to reduce the impact of credit card processing fees. However, there are many rules businesses must follow in order to charge checkout fees, as well as pros and cons that should be considered before deciding if surcharging your customers when they use credit cards is the right move for your business. Fast Facts on Credit Card Surcharges:
- Surcharges are legal in most states.
- It is not against merchant agreements; the card brands allow surcharging.
- Surcharges are prohibited in Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, and Oklahoma.
- Where legal, surcharges are only allowed on credit cards, NOT debit cards.
- Surcharges are capped at 4% or the “actual cost of processing,” whichever is lower.
- You must inform customers of the surcharge before checkout.
- Surcharges and cash discounts are not the same thing.
**Recently, many 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 Are cash discounts legal? **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.**
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- Surcharging Basics
- Pros and Cons of Checkout Fees
- The “Dont’s” of Merchant Surcharging
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 credit card is “bona fide” convenience over other forms of payment — for example, if the only other option for the customer would be a money order.
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.
What has changed are the rules regarding surcharging or checkout fees. Checkout fees have historically been defined as a fee charged to consumers who use credit cards that would not have been charged if the consumer had paid with cash or a check. Visa and MasterCard have always prohibited these fees as part of their merchant agreements; Discover and American Express allowed them, but forbid businesses to surcharge their cards differently than any other brands. So, unless a business only accepted Discover and American Express, checkout fees were off the table.
As of January 27, 2013, these rules have changed. Businesses are now allowed to charge checkout fees to customers who use Visa and MasterCard credit cards (NOT debit cards!), and may continue to surcharge Discover and American Express, who were not involved in the recent settlement. There are limits on what merchants can charge and conditions that merchants must meet in order to charge checkout fees — the next part of this article will explore these in depth.
States Where Surcharging is Banned
If your business operates in any of the states (CO, CT, FL, KS, ME, MA, OK) whose state laws prohibit surcharging, you may not charge checkout fees in that state. However, if you do business in multiple states, you may still surcharge credit card transactions in those states where the practice is not banned.
Hawaii, Illinois, New Jersey, and Rhode Island have legislation pending that will ban surcharging if passed.
Finally, there is an alternative – 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.
While California once prohibited surcharging, court challenges have called the ban into question. As of early 2018, courts in the state of California have ruled that the ban on surcharges is unconstitutional as it places restrictions on business’ speech. It’s unclear at the time if the Attorney General will appeal the decision.
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 now serve businesses in California. Razi explains, “Under this authoritative, controlling precedent, we’re now serving all California merchants that seek the single-sticker pricing model—which, in real-world terms, would be quoted as, “$10, with a 3.5% surcharge for credit.”
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.
More information is available at the Office of the Attorney General of California’s website.
Florida is another state that has faced divided judicial opinion. In Bondi v. Dana’s Railroad Supply, Florida’s statute prohibiting surcharges was challenges as a free speech restriction. While initially a court sided with the state, subsequent appeals sided with the business and upheld that surcharges should be permissible.
Businesses in Florida that are interested in surcharging should check with a licensed attorney or the state’s attorney general for the most up-to-date information on the state’s surcharging laws.
As of 2018, Texas businesses can surcharge. 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.
CardX’s Razi tells CardFellow, “With this legal victory, Texas joins California and Florida as states where “no-surcharge” restrictions have been declared unconstitutional. Now, Texas businesses have the option to pass on the fee when their customers choose credit cards for convenience or rewards.”
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 would allow 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.”
Razi anticipates it will be only a matter of months before surcharging is available to businesses in all 50 states.
How to Get Started
If you’re allowed by state law to charge checkout fees, 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 merchants must fill out posted on their respective websites — you can find Visa’s here and MasterCard’s here. Each brand requires 30 days notice before you may begin charging checkout fees.
- Inform your acquiring bank of your intent to surcharge as well. 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 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.
Prepare your place of business.
- Both Visa and MasterCard require merchants 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 checkout 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 merchants 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.
Pros and Cons of Checkout Fees
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 adding checkout fees, but you can defray a large percentage 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 their processing costs increase.
- 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. Many large retail chains (including giants such as Home Depot and Wal-Mart) have already 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 will 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 being carried in their wallet.
- It is 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 merchant that doesn’t surcharge, why would they go to the one who does?
- Your typical transactions are higher 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 checkout fee will cause them to buy less — or not purchase from you 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 checkout fees through the eyes of your customers and carefully consider whether those fees will make up for any loss in revenue.
The “Dont’s” of Surcharging Credit Cards
Both the court settlement and the cards brands have outlined specific limits on surcharging in order to protect consumers. If you decide to charge checkout fees, protect yourself from costly chargebacks or other 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 checkout fee higher than 4% of a transaction. This limit is outlined in the settlement.
- Don’t surcharge debit cards or prepaid cards. These forms of payment are specifically excluded from the settlement.
- Don’t fail to let your customers know that you charge checkout fees. The exact requirements set forth by the card brands are outlined above — your customers should always know what forms of payment you surcharge, as well as how much you surcharge, before they use their card.
- Don’t keep checkout fees when refunding customers. When issuing refunds, you must also refund any checkout fees that were charged — even for partial refunds. For example, if you refund 50% of a customer’s money, you also have to refund 50% of the checkout fee you collected.