The costs of goods, supplies and labor are rising for business owners of all types and sizes. Passing a portion of card acceptance costs to customers for purchases helps businesses create savings without raising prices overall.
As a consumer, you’ll likely have paid an extra fee for using a credit or debit card when making purchases in person or online. Common examples include a “cash versus credit” price at gas stations, a small fee to renew your driver's license or car registration, a fee for buying concert or museum tickets online, or a surcharge added to the bill from your local restaurant.
While the effect is the same—offsetting transaction fees by adding an extra charge to the total purchase price—multiple fee programs exist, and the rules applied to each vary. Let’s take a closer look at the four most common cost relief programs available: Credit Card Surcharging, Convenience Fees, Service Fees, and Cash Discounting.
Is it Legal to Charge a Fee for Payment Acceptance?
The simple answer is, not always. Businesses can charge extra fees, but it’s not a free-for-all. Rules vary by fee program, card brand, industry segment, payment acceptance channels, and state.
It’s recommended that you consult with your payment provider and your legal counsel to understand the pros and cons of fee programs, as well as the rules and regulations required to comply with each.
What is a Credit Card Surcharge?
Credit card surcharging saves merchants money by passing some of the credit card transaction costs to customers. The surcharge is a percent of the total purchase cost, and it cannot exceed the amount a merchant pays. Card brand rules and various state laws restrict surcharging. This Visa website provides additional details on surcharging restrictions in certain states.
Typically, surcharges are set to a maximum of 3% and can be applied to in-person, keyed, online and recurring transactions when a customer pays with a credit card. The surcharge must be clearly communicated as an additional fee that the merchant is applying to credit card purchases. Customers can avoid the fee by switching to cash, check, debit card, prepaid card or ACH bank payment.
Learn more about credit card surcharging in this detailed article on our blog
Credit Card Surcharge vs. Convenience Fee
Unlike surcharges, convenience fees are legal only if they’re charged for the privilege of using a payment acceptance channel that is secondary (i.e. online) to the standard (i.e. in-store) offering. They can be applied to any payment method (credit, debit, ACH) when accepted through a secondary payment acceptance channel. Businesses apply a flat fee (fixed price) to the total. Consumers can avoid the fee by paying in person or via another primary channel (i.e. mailing a check).
Convenience fees allow businesses to offset the higher cost of card-not-present transactions while extending a choice of payment methods to customers. Consumers may be willing to pay the added fee if it saves a trip to a physical location or replaces writing and mailing a check. Additionally—depending on the card’s benefits—some consumers may opt to pay a fee for the convenience of using a credit card to help control finances or earn rewards or cash back.
Businesses that adopt convenience fees must have a card-present payment channel. Additionally, convenience fees can’t be applied for recurring, subscription or installment payments.
Entertainment venues, such as movie theaters and concert venues that operate a box office and sell tickets online commonly charge convenience fees.
Credit Card Surcharge vs. Service Fee
Unlike surcharges and convenience fees, service fees are not allowed for most businesses. They are reserved for government agencies and educational institutions and can be applied to payments made with debit and credit cards, including tuition, taxes, fines, fees and court costs.
Service fees can be a flat fee or a percentage of the total amount and are applied to in-person or online transactions for purchases made with a credit or debit card. The fee may vary based on the acceptance channel, must be disclosed before payment, and included on the receipt. Consumers can avoid the fee by paying with cash, check or ACH. The service fee is run as a separate transaction amount, in addition to the purchase price.
Credit Card Surcharge vs. Cash Discounting
Whereas a credit card surcharge adds a fee on top of the posted purchase price for customers who pay with a card, a cash discount requires the business to post prices for purchases made with a card and to charge a lower price for customers who pay with cash (or sometimes check or ACH).
Cash discounting is legal in all 50 states, and the most relatable example is that of a service station that clearly posts separate gas prices for cash and cards on all signs.
Implementation can sometimes be burdensome for businesses that stock multiple items. Rules vary by state. Sometimes, the full (“regular”) price must be displayed for all items on shelf tags, menus, item tags, etc., and the cash discount price or percent must be disclosed. Some states may require businesses to employ dual pricing by displaying both the “regular price” and “cash discount price” clearly for all items. This could be cumbersome for businesses whose prices vary based on the cost of goods, or for any merchant running a sales event.
In states that don't require dual pricing, a cash discount on the total goods and services purchased may be taken. Disclosure of this cash discount can be posted, for example, at checkout and on menus.
Fee Program Comparison Chart
|Credit Card Surcharge
|Government (taxes, fees, fines) and Education (tuition, fees)
|Credit cards only
|Credit, Debit, ACH
|Cash (and sometimes check/ACH)
|Payment Acceptance Channels
|All: In person, online, phone, mail, recurring payments
|Alternate channels only: online, phone, mail. Not supported for recurring, payments. Merchants must operate physical locations or collect payment via primary channels such as mail.
|All: In person, online, phone, mail, recurring
|Mostly in-person, unless check or ACH are also discounted
|Percentage or Fixed/Flat Fee?
|Percent of purchase, capped at 3%
|Fixed fee or percentage
|Percent of purchase discounted for cash
|30-day notification required with Payment Provider
|Card brands dictate specific notification policies that must be posted at Entrance, at Checkout, on Receipts, on Website, and over the Phone
|Disclosed clearly to the Cardholder: As a charge for the convenience of payment through an alternative channel and before the completion of the transaction
|Disclosed clearly and conspicuously to customers. May be required to display at any location prices are listed (shelf, menus, item labels, etc.)
Should Businesses Add Fees to Purchases?
As a business owner, collecting fees to offset transaction costs may seem like an obvious choice. While passing some card processing fees to customers lowers costs for you, it could result in lost sales and brand bruising, so weigh the pros and cons.
In addition to ensuring that any fee program you implement follows applicable card brand and state regulations, you should assess the competitive landscape, including location, uniqueness of your product or service offering, and policies like shipping and returns. Here are a few things to consider:
- Do you operate in a price-sensitive market?
- Do you notice surcharges, cash discounting or convenience fees at businesses you patronize in your community?
- Are there other businesses nearby that offer similar goods and services at equal prices and don’t add extra fees or cash discounts?
- Do most of your customers make purchases with credit cards? What would be the customer impact to effectively raising their prices?
- Would you anticipate any social media backlash that could prevent customers from patronizing your business?
Learn which payment acceptance fees are right for your business.
Whether you’re a business owner or consumer, we’d love to hear your opinion on surcharging. Tell us in the comments section below!
Editor's Note: This post was originally published in July 2017 and has been updated for comprehensiveness and accuracy.