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Five Surcharging Rules You Must Follow to Avoid Hefty Fines

Update 8/17/23: When this article was originally published, the maximum allowable surcharge was 4 percent. As of April, 2023, the credit card brands lowered the maximum to 3 percent. Adherence to this regulation is being closely monitored by Visa as indicated in this TSG article. Merchants with current credit card surcharges above the 3 percent limit must adjust their programs accordingly.

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Surcharging is a practice that some merchants use to pass along credit card processing fees to their customers who pay by credit card. Depending on the merchant’s business, it can be an effective way of offsetting processing costs but there are specific rules that accompany all surcharging programs. These rules are designed to protect consumers, and they are taken very seriously by the credit card companies.

Visa and Mastercard have recently amped up enforcement of their surcharging rules by utilizing tactics such as secret shoppers to monitor adherence. Merchants that are found to be out of compliance face hefty fines – as much as $50,000 for a first offense.

To avoid penalties, below are the surcharging rules that all merchants must follow, regardless of size.

1. You Must Give a 30-Day Advance Notice to the Credit Card Companies

Merchants must submit a notification form to their processor and the credit card companies at least 30 days prior to implementing a surcharge program.

If you are a Wind River Financial customer, we work with you to complete the paperwork then register it with all the credit companies on your behalf. After that, we coordinate a go live and training date with you to walk through the steps associated with surcharging a transaction through your POS solution.

2. Disclose the Surcharge to Your Customers in Advance

Signage must be clearly displayed so customers will know, in advance, that a surcharge will be imposed if they pay by a credit card. The specific requirement is to post signage at the entrances and all points of sale – including menus. You must allow customers to change their payment type at POS to avoid the surcharge. In addition, the surcharge amount must also be displayed as a separate line item on the customer’s receipt.

The customer notification surcharge rule applies to all transaction channels – including onsite, online, and on the phone. Even if your customers are only placing an order over the phone, you must inform them of the surcharge, so they are not surprised when they pick up and pay for their order.

3. There Are Limits To How Much You Can Surcharge

The surcharge amount may not be greater than your current processing fees for the type of credit card being used – typically 2-3 percent. According to the rules, four precent is the maximum you can surcharge. Be aware that some credit card processors are increasing 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.

4. Only Credit Card Transactions May Be Surcharged

You may not surcharge a debit card or prepaid card transaction. Even if customers paying with a debit card choose the “Credit” option on the credit card terminal, you still are not allowed to impose a surcharge. This means you will need a method of distinguishing the type of card your customer is using at the point of purchase.

5. A Surcharge Indicator Must Be Passed With The Transaction Details

This is a rule that is technology-driven rather than merchant process-driven. But it is still a requirement of the credit card companies. As a result, merchants that surcharge are held responsible for making sure it is enabled and passed. Please be aware that not all POS software can do this. It’s wise to check with your credit card processor or the manufacturer of your equipment to ensure the surcharge indicator is being passed properly.

State Laws Vary

There may be laws specific to your state in terms of taxes on surcharge amounts, amount you can surcharge, and even the legality of surcharging. For example, there are laws prohibiting surcharging in Massachusetts and Maine. In Oklahoma, surcharging is limited to two percent. And, some states consider the surcharge amount as part of the gross receipts, therefore, subject to taxation.

The credit card companies are only monitoring for compliance with their surcharge rules and requirements. That said, it’s a good idea to check with your tax preparer or your legal counsel to make sure your program complies with your state’s laws too.

Related article: Is Surcharging a Disservice to Merchants?

If you’re currently contemplating a surcharge program, I encourage you to weigh the full impact it may have on your business. Below are some questions to consider.

  • What will it do to your sales? Customers paying by credit card tend to spend more than cash-paying customers. Significantly more, depending on your type of business.
  • How will your customers respond? A surcharge is essentially raising your prices on a subset of your customer base. The subset that happens to spend the most money with you, as noted above. Will implementing a surcharge alienate these customers? You’ve worked hard to build their loyalty – do you want to risk it?
  • What are your competitors doing? Are they surcharging? If they are, will you be eliminating a point of differentiation by surcharging as well? If they are not, are you risking sending your customers to them by implementing a surcharge?

Related video: Will Surcharging Help or Hurt My Business?

Remember, there are other options that can help you improve your margins and reduce costs. These include: a cash discount program for your customers, Level II or Level III processing, and making sure your processor isn’t tacking on a bunch of unnecessary fees.

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.

Dan DeBraal

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