Surcharge vs. Cash Discount: How to Offset Credit Card Processing Fees

As credit card processing fees continue to rise, many businesses are searching for ways to recover those costs without alienating customers. Several options exist, such as surcharges, cash discounts, and other fees, but not all are created equal.

The key is finding an optimized, compliant approach that maintains transparency, protects customer trust, and helps offset credit card processing fees without adding complexity.

Is It Legal to Charge Customers to Offset Credit Card Fees?

Yes, in most states you can offset payment processor fees, but different methods have varying rules and regulations. Since each fee program has its own limits and compliance requirements based on state law and credit card network rules, it's essential to identify the right method for you.

In states where surcharging is legal, many businesses have found that a credit card surcharging strategy is best for them. With a supportive payment processor who makes compliance and implementation easier, a surcharging program can both offset credit card processing fees and protect the customer experience. Modern payment technology, like PayJunction's SmartSurcharge™, will offer built-in tools that automatically identify card types and apply surcharges only where allowed. This ensures that credit card surcharges never appear on debit cards or prepaid cards, removing a common compliance risk.

In the few states where surcharging isn’t permitted, a cash discount or service fee can provide an alternative, but these programs should be implemented carefully to remain compliant and may not be worth the effort they require.

What Is a Credit Card Surcharge?

A surcharge is a small percentage of the transaction (often 3%) that is added as a fee to eligible credit card transactions to offset credit card processing fees. It allows the businesses to recover some of the costs charged by their credit card processors, offering customers the choice to pay the fee or switch to a different payment method. Government and credit card network regulations typically cap surcharges around 3%, though limits may vary.

Optimized surcharging uses automation and card-type detection to ensure the surcharge is applied only to credit cards, never to debit cards. Optimized surcharge technology will display the fee clearly to the customer before checkout, offering the freedom of choice, maintaining transparency, and following compliance guidelines.

Cash Discounting vs. Surcharging

When implementing a cash discount program, most merchants raise listed prices and then offer a discount at checkout to customers who pay with cash or other non-card methods. A cash discount might only reward those who use cash, an increasing rarity for modern consumers. This effectively raises prices for most customers and does not offer them the freedom to avoid the upcharge with a convenient payment method. Additionally, while cash discounting is legal nationwide, it can create confusion and inconsistent pricing for in person transactions across different locations and online transactions.

At PayJunction, we find that optimized surcharging provides distinct advantages over cash discounting for most businesses looking to offset credit card fees. Utilizing the optimized technology of a program like SmartSurcharge, businesses benefit from a transparent, easy to manage option that offers compliance, reporting, and reconciliation tools and support.  

In states where surcharging isn’t permitted, a properly structured cash discount program may be worth looking at to serve as a compliant fallback option for a business looking to save money wherever possible. However, in those cases, it’s essential to clearly communicate price differences to maintain customer trust and a competitive edge. With cash discounting, posted prices (especially online) may appear higher than competitors that don’t use this model. If you accept credit cards, and find that a significant number of your customers use this method, this pricing model may negatively affect their experience similar to a price increase.

This is why, for most businesses, optimized surcharging is the preferred model to offset credit card processing fees. When done right, it offers a transparent, scalable way to manage the fees payment processors charge them while avoiding hidden costs to the customer experience.

Surcharging vs. Convenience Fees

A convenience fee is a flat rate pricing method that charges a flat fee for using an alternative payment channel, such as paying online instead of in person.

However, these fees are limited in scope. They can’t always be applied to every card type or transaction. For businesses that want more flexibility and consistency across in-person, online, and recurring payments, optimized surcharging is the better long-term solution. Convenience fees can still work for specific use cases, such as ticketing, utilities, or education payments, but most businesses benefit from a system designed to scale across all payment environments.

Surcharging vs. Service Fees

A service fee is typically reserved for government agencies or educational institutions that accept cards as a public service. Because these fees operate under unique rules, they’re not appropriate for most commercial merchants. For most industries, optimized surcharging offers a more compliant and efficient way to manage credit card fees for businesses looking to offset payment costs.

Should Your Business Use SmartSurcharge or Cash Discounting?

Recovering credit card processing fees can be a smart strategy, but it must be done correctly. SmartSurcharge helps you balance compliance, transparency, and profitability while avoiding chargeback fees and compliance issues. Poorly executed surcharge programs, on the other hand, can result in penalties, errors, or loss of customer trust.

Consider these questions before deciding:

• Do you want a payment system that automatically handles card-type detection and compliance?
• Do you want technology that allows customers to see surcharges as transparent line items instead of hidden costs? 
• Do you process credit card payments in multiple states or channels?
• Are you operating in a state where surcharging is permitted?
• Do you want a credit card processor that provides the support, signage, and training needed to stay compliant?

If you answered yes to any of these, SmartSurcharge is likely your best solution. It’s the simplest, most compliant, and most customer-friendly way to manage payment processing fees. 

Credit Card Fee Offset Programs: A Comparison Chart

SmartSurcharge: Why it Wins in the Long Term

SmartSurcharge provides a structured, adaptable way to keep pace with changing regulations and evolving customer payment preferences. It helps businesses stay compliant, avoid costly errors, and adjust strategy easily as regulations and consumer behaviors shift.

By combining reliable payment technology with clear policies and regular compliance reviews, you can easily implement surcharging in a way that offsets credit card processing fees and supports long-term customer relationships.

Here’s what separates SmartSurcharging from the rest:

• Built-in compliance tools: Surcharging in the U.S. is governed by a patchwork of state laws and credit card network rules. Choose a payment processor with technology that automatically identifies card types and offers customer-facing terminals that clearly disclose surcharge amounts during checkout to reduce compliance risk and make transactions easier for staff.
• Remote payment compatibility: As Text to Pay and online payments grow, look for a payment processor that supports compliant surcharging across every channel. Digital invoicing should display surcharge amounts and offer card-type detection just like in-person terminals, ensuring consistent compliance and clear communication.
• Automation at the right points: Automation throughout the payment process ensures surcharges are applied accurately to each credit card transaction. The right technology automatically calculates surcharge amounts, excludes debit cards, and displays surcharges as separate line items on receipts. Automated refunds, recordkeeping, and reporting reduce manual work and minimize human error.
• Seamless Integration: Surcharging shouldn’t create more work for your team. SmartSurcharge is compatible with the browser-based software you’re already using and doesn’t require a complete overhaul of staff workflows.
• Access to expert guidance: Because credit card network rules change often, it’s critical to have access to experts who understand payment processing regulations. A trusted credit card payment processor should provide training, signage templates, and ongoing compliance support to make fee recovery simple and transparent.

Given the downsides of other methods, and the ease with which businesses can offset credit card processing fees with a modern business solution like SmartSurcharge, surcharging is often the preferred choice for businesses in states that allow it.  

Optimize How You Handle Payment Processor Fees

While other fees may work in limited situations, SmartSurcharge is the modern standard for managing credit card transaction fees transparently and compliantly. Cash discounting can be a good option for merchants looking to manage rising credit card processing fees in states where surcharging isn’t allowed. Even then, it should be structured carefully to meet legal requirements and customer expectations.

SmartSurcharge delivers maximum savings to compliantly offset processing fees with consistency, reducing processing costs, avoiding chargeback issues, and offering businesses a way to handle rising interchange fees without raising prices. PayJunction helps businesses implement optimized surcharging with automation, clear disclosures, and expert support. We make it easy to offset credit card processing fees, maintain compliance, and provide a seamless checkout experience. Want to see how optimized surcharging would work for your business? Talk to our team to get a free statement analysis and see how much you could save.

Editor's Note: This post was originally published in July 2017 and has been updated for comprehensiveness and accuracy.