What Business Owners Need to Know About Surcharge Fees - credit card inserted in terminal

What business owners need to know about surcharge fees

Thursday, November 18, 2021

When it comes to running your business, you already know the benefits of accepting credit cards at your company. Compared to other payment methods like cash, accepting credit card payments can come with more fees that affect your bottom line. After all, your business has to pay the processing fees to the credit card brands, banks and payment processors to handle these types of payments.

One way to mitigate these higher fees is to add a credit card surcharge fee to customers’ purchases. This effectively passes costs on to the customer, and helps your business recoup the costs of accepting credit cards.

In this article, we’ll talk about surcharge fees, the common uses for surcharges, some considerations for applying surcharge fees and surcharge rules that might apply to your business. To start, let’s define and talk more about surcharge fees.

What are surcharge fees?

As a merchant, you’ve probably heard of surcharges before. In fact, as a customer, you’ve probably had to pay surcharges at other businesses. Surcharges are small fees that a company adds to a credit card transaction to help them cover the cost of doing business. Another name for a surcharge is a checkout fee. Often, this surcharge is to make up for the processing costs or interchange fees of the big card networks – Visa, Mastercard, American Express, and Discover – and the cardholder’s bank charge. 

These fees help handle both the transaction of getting money from the cardholder’s account to your business’s account and the costs associated with dealing with credit cards—handling costs, fraud and bad debt costs, chargeback fees and reissuing compromised cards.

Other times, surcharges can cover the higher cost of goods and services, like surcharges a taxi company may charge due to rising fuel costs. The idea behind surcharge fees is that they allow a small business like yours to accept credit cards as a form of payment and pass on the business’s credit card expenses to the customer who wants to pay with a credit card.

While surcharges used to be illegal, a settlement in 2013 between retailers and Visa and Mastercard made it federally legal for merchants to implement surcharges at their businesses.

So what’s a surcharge fee look like? There are many rules and regulations depending on the card associations, but it’s generally a fixed percentage of each credit card transaction. This fee can’t be more than the percentage of the transaction a business pays in fees. In other words, a company cannot profit from charging a surcharge. They can only recoup their costs from accepting credit cards as payment. For example, if a company’s effective rate (the rate they pay after adding up all of the processing costs) is 2.7%, they cannot charge a customer 2.8% or more; they can only charge them 2.7%.

Another important note about surcharge fees is that your business can only apply these fees to credit cards. You can’t apply surcharges to debit cards or any prepaid cards. They are also distinct from another type of credit card fee: a convenience fee. A convenience fee is a flat-rate charge that merchants can add to transactions that are different from the payment type they primarily accept. Merchants can charge either fee, but they cannot charge both a surcharge fee and a convenience fee.

Is a surcharge fee right for your business?

Now that you know more about surcharge fees, you’re probably wondering how your business can implement them. These additional fees sound like a great opportunity for your business to defray some of the operating costs you face. However, there are some important considerations before you implement a surcharge at your business. Let’s take a look at a few of the most significant considerations:

Will you lose customers?

As you may expect, the biggest consideration when evaluating surcharges is if you’ll lose business due to implementing these fees. Many customers don’t like to pay more fees, so your business runs the risk of losing customers with an added surcharge. However, if your business is unique or has a loyal customer base, you may lose fewer customers as a result of a surcharge.

What’s the competition doing?

It’s also important to evaluate what your competitors are doing. If they sell the same or a similar product, surcharges could cost you customers. That’s because customers have the flexibility to purchase from another retailer that doesn’t implement a surcharge. Most likely, they’ll be able to purchase the items cheaper from another retailer that doesn’t have a surcharge. But, if it’s standard practice for your industry to add a surcharge, you may be more open to the idea of adding a surcharge for your business.

Which cards does your business accept?

Another consideration is taking into account the card brands your business accepts before implementing surcharges. Because each card network is different, they all have slightly different guidelines for merchants who want to add surcharges for credit cards. If you accept cards from all of the networks, you’ll need to make sure you meet their requirements before starting to charge surcharge fees.

What industry is your business in?

The final consideration is taking stock of your industry. Businesses in many industries impose surcharges to pass on costs associated with federal, state or local regulations. Surcharge fees are more common in certain industries and can help you defray some of these costs.

After evaluating each of these considerations, you’ll be able to evaluate if a surcharge fee is right for your business. Now, let’s take a look at the rules businesses must follow regarding  surcharge fees.

The rules of surcharge fees

If you decide to implement surcharge fees in your business, there are some particular rules you’ll need to follow. As always, it's best to clarify these rules and how they would specifically apply to your business. Here are a few of the rules your business needs to follow:
  • Decide if it’s legal to implement surcharges in your state – Many state laws prohibit or limit surcharges on sales to consumers. For now, your business cannot impose surcharges in Connecticut, Massachusetts or Puerto Rico. There are also some states – Kansas, California, Florida, Maine, New York, Oklahoma, Texas and Utah – that have complicated anti-surcharging laws. Merchants in these states should seek the advice of qualified legal counsel to learn more about the legality of surcharges. 
  • Notify the card associations and merchant services provider – You’ll need to notify each of the card associations and your merchant services provider, in writing, of your business’s intent to apply surcharge fees. This notification must be sent 30 days prior to implementing surcharge fees. While American Express doesn’t require you to notify them, it’s good practice to inform them anyway.
  • Surcharges for credit card processing can’t be more than your effective rate – Your business can’t profit from surcharges. This means your surcharge fee can’t be more than the rate your business pays for credit card processing, up to 4%. Some states also limit the max percentage of surcharge fees, like a 2% max surcharge fee in Colorado. Therefore, it’s important to review your state’s requirements and know your effective rate.
  • Refunds must include surcharge fees – If a customer requests a refund and your business processes it, you must provide a full refund of the surcharge fee or a partial amount for a partial refund.
  • Post notification of the credit card surcharge at your business – Implementing surcharge fees requires that your business post notice of the fees to your customers, both at the entrance of physical stores and at the point of purchase, whether in-store or online. This includes posting a notice on your ecommerce website. Your business must also include surcharge fees as a line item on receipts.
  • The surcharge must be applied before taxes – Any surcharges must be applied to the purchase price before taxes are included.
  • Make sure you’re only surcharging credit cards – It’s important to make sure your business only adds surcharges to credit card transactions. Visa and Mastercard have restrictions that include no surcharges on debit cards.

You’ve seen the rules your company will need to follow to start adding surcharge fees to their business. But there are a few other ways you can lower costs for your business.

Other ways to lower costs for your business

If you decide that implementing surcharge fees isn’t right for your business or not allowed by law in your state, there are a few other ways you can offset the fees you pay for credit card processing.

The first way is cash discounting. This is a process that allows you to give the customer a discount equal to the cost of credit card processing if they pay in cash. For instance, if the effective rate at your business is 2.7%, then customers who pay in cash could get a 2.7% discount on their purchase. Cash discounts subtract from the advertised price and are legal everywhere in the United States. This is in contrast to surcharge fees, which add to the advertised price of a product.

The second way to offset fees is to impose a minimum dollar amount in order for customers to purchase an item using a credit card. Businesses can set a minimum dollar amount up to $10, as long as that same standard goes for all credit cards a merchant accepts.

Another way to lower your credit card processing fees is to work with your merchant services provider to adjust your agreement or look for a new one who can help you lower your processing costs. Many payment processing providers can work with your business to change the type of pricing plan to suit your needs.

When it comes to running your shop, accepting credit card payments are a cost of doing business. However, surcharges are one way to lower the costs your business pays, boosting your bottom line. As you’ve seen, it’s important to evaluate your business’s needs before deciding to implement surcharge fees. 


Ready to work with a payment processor who can help you keep costs in check?

Heartland is the point of sale, payments and payroll solution of choice for entrepreneurs that need human-centered technology to sell more, keep customers coming back and spend less time in the back office. Nearly 1,000,000 businesses trust us to guide them through market changes and technology challenges, so they can stay competitive and focus on building remarkable businesses instead of managing the daily grind. Learn more at heartland.us.