Credit Card Surcharging: A Guide

The costs of running a business continue to rise, from the soaring costs of goods and services to higher employee wages, straining margins. So it’s no wonder that business owners face tough decisions: raise prices across the board or absorb the extra costs. Fortunately, when it comes to controlling the rising costs of accepting credit cards, there’s a solution that helps merchants offset transaction fees. It's called credit card surcharging, and it’s gaining momentum. In a 2022 survey by PYMNTS.com, about 80% of cardholders reported paying a surcharge.

This article contains helpful information about credit card surcharges and outlines crucial considerations when evaluating payment providers.

• What is a credit card surcharge?
• How does a credit card surcharge work?
• Credit card surcharge rules and restrictions
• How can consumers avoid credit card surcharges?
• What are the benefits of credit card surcharges?
• What are the cons of credit card surcharges?
• Credit card surcharge vs. convenience fee
• Credit card surcharge vs. cash discounting
• Which type of businesses are best suited for credit card surcharge?
• What should businesses consider before adding a surcharge?

What is a Credit Card Surcharge?

Consumers increasingly spurn using cash for purchases, preferring the convenience of cards and digital wallets. According to the Nilson Report, in 2022, U.S. merchants paid about $160 billion in processing fees to accept $10.6 trillion in card payments. Approximately 79% of the fees were from credit cards.

Credit card surcharging transfers most of the credit card transaction costs to customers, saving businesses money. The surcharge is a percent of the total purchase cost and cannot exceed the amount a merchant pays. Due to card brand parity rules, a 3% maximum surcharge rate applies to all credit cards accepted. Customers can avoid the fee by switching to cash, check, debit card, prepaid card or ACH bank payment.

Payment consultancy TSG estimates that 5-10% of 8 million card-accepting small businesses in the U.S. add a surcharge to credit card purchases. They also report that about 15% of new merchants open with a surcharge policy.

Surcharging was prohibited until 2013 when a group of merchants in several U.S. states settled a class action lawsuit against Visa and Mastercard. The card brands agreed to allow businesses to assess an additional fee on credit card purchases, and each card brand publishes its own rules. Over the next decade, many states removed or limited restrictions on surcharging. Today, all but four states and one territory—Connecticut, Maine, Massachusetts, Oklahoma, and Puerto Rico—allow credit card surcharges in some form.

How Does Credit Card Surcharge Work?

Surcharging allows businesses to add a small fee (typically 3%) to in-person, key-entered, and online transactions when a customer pays with a credit card. The surcharge must be clearly communicated as an additional fee that the business is applying to credit card purchases.Businesses must return the surcharge on credit card refund transactions.

Businesses may offset up to a 3% surcharge or decide to share in the cost of acceptance by applying a rate less than the total capped amount, say 1.5% - 2%, which lowers their costs while lessening the impact on customers. This strategy is applied to avoid losing the sale or turning customers away from future purchases.

Typically, the payment provider adds the surcharge on behalf of the business and uses the additional funds to offset a portion of the total monthly fees charged for processing payments.

Credit Card Surcharge Rules and Restrictions

While surcharging is legal in all but a handful of states, and the card brands have amended their acceptance guidelines to allow credit card surcharging, businesses must follow the rules regarding fee implementation. Non-compliance can result in penalties, legal actions, damage to a business's reputation, and, in extreme cases, termination of a merchant agreement with the card brands. It’s a good practice to consult your legal counsel for surcharging advice specific to your circumstances. You should also read your payment provider’s Terms and Conditions regarding surcharging.

Registration with your payment provider must occur at least 30 days before you can add a surcharge to transactions.

• Typically, the payment processor, such as PayJunction, will enroll businesses in surcharging and register the merchant with Mastercard (the only card brand that requires registration).
• Only businesses on the AMEX OptBlue program offered by their payment provider can choose to assess a surcharge on American Express transactions.

Disclosure language must be clearly communicated on signage for each acceptance channel implementing a surcharge: at the store’s entrance and point of sale, on websites, in apps, in invoice payment requests, and verbally for telephone orders. You must inform customers that they can avoid the surcharge by paying with a method other than a credit card.

• The percentage of the purchase price the merchant will add to any purchase made with a credit card must be disclosed as an add-on fee.
• The surcharge is applied to the full cost of goods and services.
• It must be included as a separate line item on the customer’s receipt.
• You must return the surcharge on credit card refund transactions, proportional to the amount refunded.

The surcharge cannot exceed a merchant’s actual cost of credit card acceptance and is capped at 3% of the purchase price to maintain parity across all brands. Applying a consistent surcharge fee eliminates confusion among staff and customers.

• Effective April 15, 2023, Visa lowered their surcharge cap to 3%. Purchases made with branded debit cards, whether PIN- or signature-based, cannot be assessed a surcharge.
• A surcharge may not be added to purchases made with alternative debit cards, including prepaid, FSA, HSA and Medicare Flex cards.

Credit card surcharging is not currently supported in Connecticut, Maine, Massachusetts, Oklahoma, and Puerto Rico.

• In Colorado, surcharges are capped at 2% of the transaction value or the actual amount the merchant pays to the payment processor. Specific disclosures are also required.
• In New York, the higher credit price or both cash and credit prices must be displayed.
• California businesses and businesses selling in California must advertise and list prices for goods and services that include all required or mandatory fees or charges other than certain government taxes, such as sales tax, and shipping costs.

How Can Consumers Avoid Credit Card Surcharges?

Consumers can avoid paying the surcharge by making purchases with a debit card (PIN or signature), prepaid card, cash, check or ACH direct bank transfer. 

It’s not always clear that a shopper is opting out of paying the surcharge since many may abandon their purchase before entering a store or checking out on a webpage. Instead, they may silently switch to a competitor that does not assess a surcharge.

What are the Benefits of Credit Card Surcharging?

Businesses that enact surcharging realize savings on the total cost of payment acceptance, though the impact varies based on a payment provider’s supported features.

Surcharging offsets the cost of payment acceptance by adding a percentage fee to the total purchase price for consumers who opt to pay with a credit card. 

• The public’s soaring appetite for digital experiences has shifted to online payments, mostly made with credit cards. Merchants operating on thin margins have the most to gain from passing fees to customers.

Businesses don’t have to raise prices for everyone. Raising prices to absorb higher transaction fees means all customers pay more, even when using cash or a debit card. Credit card surcharging gives consumers a clear choice.

• Many consumers carry rewards cards that accumulate points or offer cash back, typically equating to 1% - 2% of purchases. The net impact of a 3% surcharge may be tolerable for cardholders willing to pay a little more on everyday purchases in exchange for the larger value of airline tickets, hotel stays, or cash rebates.

Registering for a surcharge program helps ensure compliance with card brand rules. Businesses should avoid going “rogue” by marking up purchases that don’t follow industry standards. 

• Working with a registered Payment Service Provider (PSP) like PayJunction helps a business comply with card brand rules and requirements regarding enrollment, applicable surcharge percentages, debit card exclusions, customer disclosures and transaction receipts

Applying a surcharge across all acceptance channels maximizes savings. Most businesses accept payments made in person (Card Present) as well as online or over the phone (Card Not Present).

• Working with a provider that supports surcharges for omnichannel payments made face-to-face, on websites, invoices, recurring payments and phone orders results in increased savings.

What are the Cons of Credit Card Surcharges?

While offsetting fees offers significant savings potential for businesses, the downside could be smaller average tickets and lost customers.

Customers don’t like paying more for goods and services. When consumers see a published price, that is what they expect to pay. Adding fees to the total may not seem fair, and could create an obstacle to finalizing a purchase. For businesses with a loyal customer base or unique products or services, customers may take the surcharge in stride. However, you risk losing the sale—and future purchases—if they can walk down the street or visit another website for a similar experience.

Credit Card Surcharge vs. Convenience Fee

Credit card surcharges are available across all acceptance channels and only apply to purchases made with a credit card. Convenience fees allow businesses to offset the higher cost of card-not-present transactions by extending a choice of credit or debit card payments to customers, and adding a small fee. Consumers may opt to pay the fee, especially for high-ticket items so that they can control their finances and/or earn rewards points.

Convenience fees allow businesses to add a flat fee to purchases made online, via phone and mail, or at a kiosk. Consumers may be willing to pay a little more for the “convenience” of buying something without visiting a physical location. Merchants must also have a card-present payment channel since convenience fees are not allowed for in-person payments. Additionally, convenience fees can’t be applied for recurring, subscription or installment payments.

The convenience fee is a merchant-defined fixed fee that must be clearly shown to the payee before payment, and customers must be allowed to cancel the transaction. The fee is not required to be printed on the receipt. Consumers can avoid the fee by paying in person.

Entertainment venues, such as movie theaters and concert venues that operate a box office and sell tickets online are good prospects for convenience fees.

Credit Card Surcharge vs. Cash Discounting

A cash discount is the flip side of credit card surcharging. 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 charges a lower price for customers who pay with cash. 

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.

While it may seem logical to offer a discount for cash; after all, there are no “transaction fees,” implementation can be burdensome for businesses that stock multiple items. The full (“regular”) price must be displayed for all items on shelf tags, menus, item tags, etc., and the discount price must be applied to every purchase made with cash. Some states may require businesses to employ dual pricing by displaying both the “regular price” and “cash discount price” clearly for all items. This becomes cumbersome for businesses whose prices vary based on the cost of goods, or for any merchant running a sales event.

Which type of Businesses Are Best Suited for Credit Card Surcharge?

Any business that accepts credit card, debit card and cash payments is a candidate for surcharging and can benefit from offsetting up to 3% of their credit card transaction fees. Businesses that do not currently accept credit cards due to the perceived prohibitive cost can confidently extend the convenience of card payments to customers without impacting margins. An ideal merchant profile is a business whose customer base isn’t price-sensitive, offers an exclusive product or sought-after service, and has few competitors.

It’s more likely that a consumer would abandon an online purchase to check out competitor deals than to walk away from a business once they are at the checkout. 

• Businesses that take in at least 70% of their revenue from in-person purchases are better suited to assessing a surcharge. 
• Customers may be more likely to tolerate a surcharge from businesses and organizations that offer a unique product or experience (museum, concert venue, 5-star restaurant) or that create an emotional connection with customers (non-profit).
• Consumers may balk at paying more than $5 on top of the purchase price and may be annoyed for feeling “nickeled-and-dimed” on low-cost items. Therefore, the ideal average ticket range for adding a surcharge is about $25 - $200. Chances are, customers who choose to avoid the surcharge have sufficient checking account balances to cover the purchase should they decide to pay with cash or a debit card.
• Ideal segments include home/personal services, auto repair/parts, non-profits, veterinarians, liquor stores, retailers and restaurant operators.

What Should Businesses Consider Before Adding a Surcharge?

Adding a credit card surcharge should be part of a broader analysis-based decision process for business owners. Be sure to cast a wide net that accounts for more than the cost of payment acceptance.

Analyzing Your Business Environment:

Take an honest look at your business and the competitive landscape, considering location, business differentiators, and policies like free shipping.

• Do you operate in a price-sensitive market?
• Do you notice surcharges at the businesses you patronize in your community? Are you personally comfortable with the added fees on your purchases? 
• Are there other businesses nearby that offer similar goods and services at equal prices and don’t add on a surcharge?
• Are most purchases made with credit cards? What would be the customer impact to effectively raising prices?
• Does your business accept tips? What’s the risk of lower employee morale if patrons cut back on tips to pay a surcharge?
• Are you cautious of social media backlash that could prevent new customers from patronizing your business?

Assessing Payment Service Providers

Some Payment Service Providers may not support all the available features of surcharging, so do your research. Working with an ethical provider that offers transparent interchange-plus pricing may be an effective way to lower transaction costs without alienating customers who shun credit card surcharging.

Consider quantitative factors such as socioeconomic demographics across your footprint, competitor practices, average ticket amounts, current payment mix, and customer relationships. You could also consider raising prices on goods and services to increase profit margin if it doesn’t alienate customers.

• A provider like PayJunction can enable credit card surcharging at the location level, allowing business owners to add a surcharge where it is most acceptable.

Maximize savings across all channels by working with an omnichannel payments provider that supports credit card surcharging in person, online, in invoices, over the phone, and through recurring payment plans.

Find a provider that doesn’t offer a “one size fits all” surcharge fee. Check if your provider allows you to set a surcharge lower than 3% to lessen the impact on cardholders.

Ensure you are in compliance by remaining at or below the 3% cap for parity across all brands and by following state laws. Post surcharge disclosures clearly as outlined by the card brands.

• Work with a provider interested in educating you and your staff about surcharge rules and regulations.

Analyze your statements to uncover bundled rates, hidden fees and mark-ups from your current provider. These unethical billing practices could be eating into your margins.

• In addition to offering pricing plans designed for surcharging, PayJunction offers Interchange-plus pricing and doesn’t charge made-up fees for things like risky transactions or PCI and EMV compliance. You may learn that you can uncover enough savings to lower, or even eliminate, the surcharge percent, potentially giving you a competitive edge.