As the tools and strategies available to merchants evolve, one area that’s gained significant attention recently is credit card surcharging. Surcharging is a practice that allows businesses to pass on most of the cost of credit card processing fees directly to their customers. If implemented correctly, surcharging can be a valuable way to manage rising operational costs. However, navigating the legal landscape and maintaining customer trust requires a thoughtful and ethical approach.
What is a Surcharge?
At its core, credit card surcharging enables businesses to add a small fee to a customer's total when they choose to pay with a credit card. This fee helps offset the cost merchants incur for processing these payments. It’s essential to note that surcharging applies only to credit card transactions, not to debit cards, cash, checks, or ACH bank payments.
While surcharging is legal in most states, it comes with its own set of rules and regulations. For example, the surcharge is typically capped at 3% and must be disclosed to the customer before they complete the transaction. This transparency is crucial, ensuring customers are fully aware of additional costs before using their credit card.
The Legal Landscape: Recent Changes in Surcharging Regulations
Recent legislative changes, particularly in states like New York and California, have put surcharging practices under the microscope. The purpose of the new laws is to help protect consumers from hidden fees and ensure businesses operate transparently.
Credit Card Surcharge is not supported in Connecticut, Maine, Massachusetts, or Oklahoma. Merchants are responsible for determining the legality of surcharging in their state, and are liable if their activities are unlawful.
It’s recommended that you work with your attorney and your payment provider to ensure compliance with card brand rules and local laws, especially if you do business in any of the states mentioned above.
- Starting in February 2024, New York’s new law requires businesses to display the higher credit price or both cash and credit (cash+surcharge amount) prices. For more information, see New York Credit Card Surcharge Guidance.
- Starting in July 2024, California implemented a new law for merchants in California and selling in California. The listed price for goods and services must include all required or mandatory fees or charges other than certain government taxes, such as sales tax, and shipping costs. For more information, see California Credit Card Surcharge FAQs.
If your business is in New York or California, you may want to consider cash discounting rather than surcharging. These regulations highlight the importance of clear communication and ethical pricing practices in building and maintaining customer trust.
The Importance of Ethical Pricing and Billing
While the financial benefits of surcharging are appealing, it’s vital to approach this practice ethically. Ethical pricing means being transparent with your customers about additional fees and ensuring that these fees are reasonable and compliant with state and federal laws and card brand regulations.
Clear communication is vital. Customers should never be surprised by a surcharge at the point of payment. Instead, clear signage and staff should inform them upfront before beginning the transaction process. Full disclosure helps maintain customer trust and ensures compliance with the increasingly strict surcharging laws and card brand regulations.
Benefits of Credit Card Surcharging for Merchants
For merchants, the benefits of surcharging are clear: it allows you to pass on most of the processing fees to customers, which can significantly reduce your overall costs. Businesses with a high volume of credit card transactions, with an average ticket of $25 - $200, or that provide a highly-valued product or service will benefit the most.
By implementing surcharging, you can improve your bottom line without increasing the prices of your products or services across the board. Instead, only customers who pay with a credit card will absorb this cost, allowing others to avoid the fee by choosing a different payment method.
Best Practices for Implementing Surcharging
If you’re considering adding a surcharge to your payment process, here are some best practices to ensure you do it right:
- Stay Informed About Local Regulations: Different states have different rules regarding surcharging, so it’s crucial to stay informed about the laws in your area. Ensure your surcharging practices comply with local regulations to avoid penalties and maintain customer trust.
- Cap Your Surcharge Appropriately: The surcharge should not exceed the actual cost of processing the payment, up to a maximum of 3%. Overcharging not only risks non-compliance but can also damage your relationship with customers.
- Clear and Early Communication: Ensure customers know any surcharges well before they reach for their credit card. Post signage at the entrance and checkout, include notification on your website and have staff verbally communicate the fees for phone or in-person transactions. Customer receipts must display the surcharge as a separate line item.
- Offer Multiple Payment Options: Giving customers a choice to pay with debit cards, cash, or other methods without a surcharge can help mitigate potential adverse reactions to the fee while ensuring you follow card brand regulations and state laws.
- Monitor Customer Feedback: Consider how your customers react to the surcharge. Suppose you notice a decline in sales or see negative comments in reviews and social media sites. In that case, you may need to reassess how you communicate the surcharge or consider whether it’s the right choice for your business.
Common Pitfalls to Avoid
While surcharging can be beneficial, there are some pitfalls to avoid:
- Lack of Transparency: Failing to communicate surcharges clearly can lead to customer dissatisfaction, reputational damage, and potential legal issues or card brand violations. Transparency should be a priority in every transaction.
- Overcharging: Charging more than the actual cost of processing the payment is not permitted by the card brands, is illegal in many states, and can drive customers away.
- Inconsistent Application: Ensure your surcharge policies are applied consistently across all credit card transactions. Inconsistencies can create confusion, erode trust, and may not comply with card brand rules.
How PayJunction Can Help
Navigating the complexities of surcharging can be challenging. As more states adopt stricter surcharging laws, businesses must stay ahead of the curve. We anticipate that future regulations will continue to focus on transparency and consumer protection, making it even more important for merchants to have the right tools and knowledge.
PayJunction offers tools that make it easier for merchants to implement surcharges. Our No-code Payments Integration® allows you to integrate surcharging into your existing systems without requiring extensive technical adjustments. This seamless integration ensures that surcharges are calculated and displayed accurately, helping you comply with card brand rules and local laws.
By staying informed and following the best practices outlined by PayJunction, you can implement surcharging in a way that benefits your business while maintaining the trust and loyalty of your customers.
