Can a business pick and choose who pays a surcharge?

For businesses that are known to accept credit cards, the overall fee for processing them is a major challenge for them. The advent of new technology along with changing regulations and confusing pricing models often imply that expenses are going to consume the bottom line of your business. For being safe from the given costs, more businesses are opting for the concept of surcharging. On the other hand, some businesses are including the overall cost of processing the purchases of customers. It turns out to be legal. 

What is the Credit Card Surcharge?

Surcharging is referred to as the practice of including some small fee to the transactions related to credit card for covering the costs of merchants for effective payment processing. Rather than the merchant having the requirement of covering the given expense, the customer who would make the selection of paying through credit cards will by paying for the processing costs –not applying to other payment methods.

Surcharging is also referred to as the “Zero Fee.” It also goes by the name as “Free” credit card processing. You might also have come across the term cash discounting. This is the scenario in which the customer would be receiving some discount that is equivalent to the credit card processing’s cost if the individual would be paying in cash or debit card. 

While both the methods help in passing the credit card processing cost onto the end consumers, the only major point of difference between the two is that with the help of surcharging, additional cost is included to the price that has been advertised. With the process of cash discounting, the cost gets deducted from the price that has been advertised when the credit card is not being used. For the merchants out there, one of the major differences between the two methods is that cash discounting tends to be legal everywhere in the United States of America. On the other hand, the process of surcharging credit cards still remains prohibited in some territories or states. 

Understanding Credit Card Surcharge Laws

As a business, if you wish to make someone pay the surcharge, you will be required to check with the respective laws for the given territories or states in which your business tends to operate. In the duration of previous years, the number of jurisdictions prohibiting the process of credit card surcharging has minimized as legal challenges have led to several laws creating a ban on the practice.

States in the United States Not Allowing Credit Card Surcharges

In many states in the United States of America, there is the presence of anti-surcharging laws still operational. Here are some of them:

  • New York
  • California
  • Oklahoma
  • Maine
  • Florida
  • Utah
  • Texas

Some of the jurisdictions in which you will not be able to impose surcharges are:

  • Massachusetts
  • Kansas
  • Connecticut
  • Colorado 
  • Puerto Rico

If your business tends to operate in any of the given jurisdictions, then it is regarded as an illegal activity to impose credit card surcharges. However, you can still consider offering some discount to the customers who wish to pay through check or cash. 

In the given scenario, you are required to consider one limitation –you cannot go for imposing the debit card or prepaid card surcharge. You can do so only on credit cards. Transactions that are processed with the help of signature debit (also going by the name as ‘running a card as the credit’) still continue to be debit. Therefore, these remain exempted from surcharging. This is because of the overall restrictions that have been implemented by the Consumer Protection Act and Dodd-Frank Wall Street Reforms. 

Maine and New York are two states that require more disclosures for surcharging the overall fees of credit card processing. In the given cases, you are required to post both the expense of paying with cash & the expense of paying with the help of a card using cents & dollars. This remains on top of the requirements of MasterCard, Visa, Discover, and American Express. It would require your business to post notifications at POS or Point of Sale while specifying the surcharge amount. 

Benefits of Surcharging

One of the major benefits of surcharging is that the overall burden of costs related to processing will not be falling on your business. As you would pass the fees associated with merchant credit cards to the subsequent customers, you will be reducing your overall expenses. At the same time, you will also be allowing your customers to make the choice of their preferred mode of payment. For businesses that tend to have minimal margins, cost reductions of all types can be a major help.

Steps to Start Surcharging

As a business owner, if you decide that you do not wish to surcharge credit cards, then you should immediately contact the processor for enlisting their help. They might reprogram the credit card machine as surcharges are expected to be listed separately on the receipts of the customers. You will also be required to reach out to the credit card brands while ensuring that you are following the rules of MasterCard and Visa. Some of the basic requirements for surcharging can be stated as:

  • Surcharges might be applied only to the credit cards
  • The surcharge cannot feature more than 4 percent of the total transaction amount or the actual cost for processing cards –whichever might be lower
  • You should inform MasterCard and Visa about your intent of surcharging cards at least one month before imposing the same
  • You should post signage to inform customers of the respective surcharges
  • Surcharges should be clearly labeled on the receipt as some line item
  • Signage should be situated at store entrances and at the POS or Point of Sale

For accurately analyzing the overall impact of surcharging on your business, it is recommended to be careful about carefully tracking & analyzing all variables upon starting surcharging.