How to Surcharge Credit Card Purchases the Right Way

In Brief: Surcharging can seem like a simple way to recover rising credit card processing costs, but it comes with rules that merchants need to understand before getting started. The good news is that with the right payment technology and guidance, it can be handled clearly and consistently. Before adding a fee to credit card transactions, this article presents five important rules every merchant should know.

What You Need to Know Before You Start Surcharging

What is surcharging?

Surcharging is the practice of adding a separate fee to a purchase when a customer chooses to pay with a credit card. The fee is intended to help offset the costs the merchant incurs to accept credit card payments.

For some businesses, surcharging can be an effective way to help manage payment processing costs. In fact, according to a recent study, 35% of small businesses now surcharge credit card purchases. This highlights how common the practice has become among merchants looking to offset payment acceptance expenses.

However, surcharging isn’t as simple as adding a fee to every transaction. The card brands (Visa, Mastercard, Discover, Amex) have established strict rules governing when surcharges can be applied, how much can be charged, and how customers must be notified. Your credit card processor must be notified in advance of launching your surcharging program.

Below are five key surcharging rules merchants should be aware of before implementing or maintaining a surcharge program.

1. You Must Clearly Disclose the Surcharge to Customers

Customers must be informed before they complete their purchase that a surcharge will apply if they choose to pay with a credit card.

This disclosure requirement applies across all transaction channels, including:

• In-store transactions
• Online purchases
• Phone orders
• Card-not-present transactions

Required disclosures typically include:

• Signage at the store entrance
• Signage at the point of sale
• Clear notification on websites or payment pages
• Disclosure during phone transactions
• A separate surcharge line item on the customer receipt

Customers must also be given the opportunity to choose another payment method, such as cash or debit, to avoid the surcharge.

2. There are Limits to How Much You Can Surcharge

One of the most important rules that merchants need to be aware of is the maximum allowable surcharge amount.

The surcharge amount may not be greater than your current processing fees – typically 2-3 percent. According to the card brand rules, 3 percent is the maximum you can surcharge. Be aware that some credit card processors increase processing fees up to that maximum rate as a way to generate greater profits. Even though you’re not paying that higher fee, you probably don’t want your customers to be taken advantage of like that.

3. Debit and Prepaid Cards Cannot Be Surcharged

Surcharges may only be applied to credit card transactions.

Merchants may not surcharge:

• Cash
• Debit cards
• Prepaid cards
• Gift cards
• FSA/HSA cards

This rule applies even when a customer selects “Credit” on the payment terminal while using a debit card.

As a result, merchants must have payment technology capable of identifying card type and applying surcharges only to eligible credit card transactions. Before implementing a surcharging program, you should confirm that your POS system, payment gateway, or terminal is equipped to handle this properly.

4. Your Payment System Must Pass Surcharge Data Correctly

In addition to the customer-facing requirements, card brands require surcharge information to be transmitted properly within the transaction data.

This means your payment software, gateway, or POS system must be configured to:

• Calculate surcharges correctly
• Display surcharges appropriately
• Include surcharge data in the transaction records submitted to the processor and card networks

Not all payment systems support surcharge compliance requirements. Before launching a program, merchants should verify with their processor or software provider that the necessary surcharge indicators and transaction fields are being transmitted correctly.

5. You Must Apply Surcharges Consistently

You can’t pick and choose which customer receives a surcharge. If you implement a surcharge program, it must be applied to all credit cards consistently.

For example:

• You cannot surcharge one customer and waive the fee for another paying with the same type of card.
• You cannot add a surcharge only when an employee remembers to do so.
• You cannot selectively surcharge certain customers, industries, or transactions.

Consistency is one reason many businesses rely on a POS system or payment terminal to automatically calculate and apply surcharges. Automated application helps reduce errors and compliance risks.

State Laws Vary

Card brand rules are only one part of the compliance picture. Several states have enacted laws or restrictions relating to surcharging, and those laws can change over time through legislation and court decisions.

Depending on your location, state laws may address issues such as:

• Whether surcharging is permitted
• Maximum surcharge amounts
• Required disclosures
• Tax treatment of surcharge revenue

Because state regulations continue to evolve, you should consult legal counsel, your accountant, or a qualified compliance professional before implementing a surcharge program.

Related Content: Are Credit Card Surcharges Legal? 

Is Surcharging the Right Choice for Your Business?

While surcharging has become increasingly common, you should carefully evaluate both the financial benefits and the customer experience implications before moving forward.

How might it affect sales?

Customers using credit cards often spend more than customers paying with cash. Will adding a surcharge affect purchase behavior?

How will customers react?

A surcharge effectively increases the price for customers who prefer credit cards. Could that negatively impact customer satisfaction or loyalty?

J.D. Power’s research found that some merchants report customers abandoning purchases when faced with a credit card surcharge, highlighting the importance of balancing cost recovery with customer satisfaction.

Related Content: Is Surcharging a Disservice to Merchants?

What are competitors doing?

If competitors aren’t surcharging, does implementing a surcharge put you at a disadvantage? Conversely, if competitors are surcharging, will waiving the fee help differentiate your business?

Alternatives to Surcharging

If your goal is to reduce payment processing costs, surcharging isn’t your only option.

Other strategies may include:

• Cash discount programs
• Level II and Level III optimization
• Interchange optimization
• Eliminating unnecessary processor fees
• Reviewing pricing structures with your payment provider

Related Content: Evaluating Payment Processing Fee Recovery Programs 

If you determine surcharging is best for your business, keep an eye on the surcharge rules. It can save you a big expensive headache down the line. If you’d like to learn more about surcharging programs, contact us today and our team can help answer any questions you may have.