However, passing fees is not a simple choice. Laws vary by state and card network, and compliance is critical. Hence, beyond what is known as legal concerns, businesses must consider customer satisfaction and long-term financial implications before proceeding.
What Are Credit Card Fees?
Credit card fees are the costs merchants pay whenever customers use a card, usually made up of three parts: interchange fees set by card networks, assessment fees charged by the networks themselves, and processor markups, which are added by providers. These fees are applied as a percentage of each transaction, which is why many merchants ask, “what are basis points in credit card processing”, since basis points measure those small percentage markups. The differences between added customer charges are:
- Surcharges – extra fees for paying with a credit card.
- Convenience fees – applied when customers use an alternative payment method.
- Service fees – charged for specific types of transactions.
The Legal Framework for Passing on Credit Card Fees
The legal framework for passing on credit card fees is shaped by both federal rules and card network requirements. Visa, Mastercard, American Express, and Discover all allow surcharging under specific conditions, but they require clear disclosure to customers and proper registration before implementation. On top of these rules, state laws vary across the US, but with some states still prohibiting or limiting surcharges. For example, states like Connecticut and Massachusetts ban surcharging entirely, while others allow it with strict guidelines. Because of these differences, businesses must carefully review both state regulations and network rules to avoid violations. Non-compliance can result in penalties, contract termination, or reputational damage. Just as with security practices such as payment tokenization, following the proper legal process is essential for protecting both the business and its customers.
Card Network Rules and Restrictions
Visa and Mastercard both permit merchants to add surcharges on credit card transactions, but only under strict guidelines. Merchants must notify the card networks before applying surcharges and clearly disclose them at the point of sale, both on signage and on receipts, so customers know exactly what they are paying. These rules are designed to maintain transparency and fairness in the payment process. In addition, card networks cap surcharges so they cannot exceed the merchant’s actual processing cost or 4% of the transaction amount, whichever is lower. Because of the complexity of these rules, many businesses benefit from resorting to professional and experienced payment processing service providers who can ensure compliance while minimizing the risk of penalties or disputes.
How to Properly Implement Credit Card Surcharges
If they want to properly implement credit card surcharges, merchants must first register with the card networks, such as Visa and Mastercard, before adding any fees. This step ensures the provider is aware and that the business follows all required rules. Once approved, merchants must clearly disclose the surcharge to customers. Notices should be posted at the point of entry and point of sale, and the surcharge must also appear on receipts so customers understand the additional cost. Best practices include applying surcharges only to credit card payments, since adding them to debit card transactions is prohibited by law and card network rules. Merchants should also keep surcharge rates consistent and within network limits to avoid penalties, while ensuring transparency so customers feel informed and treated fairly.
Pros and Cons of Passing Fees to Customers
Passing credit card fees to customers can help reduce costs but also carries important risks that businesses must weigh carefully. Therefore, here are some common pros and cons of passing fees to customers.
Pros of Passing Fees to Customers
- Reduces processing costs for the business
Tip: Calculate potential savings and compare them against possible sales impact. - Creates more predictable profit margins
Tip: Use savings to reinvest in customer service or loyalty programs to offset fee concerns.
Cons of Passing Fees to Customers
- Risk of customer dissatisfaction
Tip: Communicate fees clearly and explain why they’re applied. - Possible loss of competitiveness against fee-free competitors
Tip: Monitor competitor policies to stay aligned with market expectations. - Compliance risks if rules are not followed
Tip: Review card networks and state laws before implementing surcharges.
Alternatives to Passing on Credit Card Fees
Instead of passing credit card fees directly to customers, businesses can explore several alternatives to manage costs. One strategy is to build processing fees into product or service pricing, spreading the cost across all sales without singling out card users. Another option is implementing cash discount programs, where customers paying with cash or low-cost methods receive a small discount; these programs have different compliance requirements than surcharges and are generally allowed in more states. Merchants can also encourage payments through ACH transfers, debit cards, or other lower-cost methods, which reduce processing fees while keeping customers satisfied. By considering these approaches, businesses can control expenses without risking customer dissatisfaction or running afoul of legal and card network rules.
Best Practices for Businesses Considering Surcharging
All in all, businesses considering credit card surcharging should follow best practices to protect both compliance and customer relationships. First, review state laws and card brand rules carefully, since some states prohibit surcharges and networks like Visa and Mastercard have strict guidelines. Employees should be trained on how to explain surcharges clearly and professionally to customers, ensuring transparency at the point of sale and on receipts. Open communication helps maintain trust and prevents misunderstandings that could harm loyalty. Additionally, businesses should monitor how surcharges affect customer retention and overall sales, adjusting strategies if negative impacts arise. By combining compliance awareness, clear employee guidance, transparent communication, and ongoing monitoring, merchants can implement surcharging effectively while balancing cost savings with a positive customer experience.
FAQs
Can I charge a credit card processing fee?
Yes, you can charge a credit card processing fee, but legality depends on state laws and card network rules, which may restrict or prohibit surcharges in certain regions.
Can I charge a processing fee for credit cards if my business is online?
Yes, online businesses can charge processing fees, but e-commerce has stricter rules. Merchants must follow card network guidelines, disclose fees clearly at checkout, and comply with state laws, just like in-person stores.
Can I charge my customer a credit card processing fee on debit card transactions?
No, merchants cannot charge a credit card processing fee on debit card transactions. Surcharges are only allowed on credit cards; applying them to debit cards violates card network rules.
How much can I legally charge as a surcharge?
Legally, surcharges are capped by card networks, typically up to 4% of the transaction amount, and cannot exceed the merchant’s actual processing costs.
What are the alternatives to surcharging?
Alternatives to surcharging include offering cash discounts, slightly raising product or service prices, or encouraging customers to use low-cost payment methods like ACH or debit cards.
References
Fit Small Business: Can You Legally Pass on Credit Card Fees to Customers?
https://fitsmallbusiness.com/passing-on-credit-card-fees-to-customers
Posnation: Passing On Credit Card Fees to Customers: A Guide for Small Retailers
https://www.posnation.com/blog/passing-credit-card-fees-customers
Ignition: Passing on credit card fees to customers or clients? Here’s what to consider
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