If you are a business owner wondering if you can offset some of the credit card processing fees your business pays by charging customers an additional fee to pay by credit card it can be challenging to find a clear answer.
This is because there are different laws, card brand agreements and consumer guidelines that need to be followed. The answer will vary depending on where you do business, and what your business is.
In this article, we will be discussing the requirements around Surcharge Fees and credit card payments, not Convenience Fees. Surcharge Fees refer to the practice of passing processing fees on to customers to cover or minimize, the amount the merchant pays for accepting credit card payments. Convenience Fees, on the other hand, are considered a fee for providing a customer with a payment option that is not normally available, for example online or over the phone payments if the merchant generally only accepts in-person payments.
Last year in Canada, both Visa and Mastercard issued settlements related to a lawsuit regarding the processing fees that merchants pay when customers use credit cards to make a purchase and both card brands outline guidelines for charging consumers a surcharge in their usage rules for merchants. Canada’s Financial Consumer Agency also references card brands merchant rules in regards to charging a service or convenience fee but provides no additional details on when, or if, the surcharge can apply.
In the United States, card brands allow surcharging if you follow each card brands specific guidelines as outlined in their merchant agreement and your business does not operate in one of the states that have a ban on credit card surcharges.
The states that do not allow credit card surcharging are:
California has a law from 1985 that prohibits merchants from adding a surcharge (or extra fee) when customers pay by credit card instead of cash.
Colorado state law says that except as otherwise provided in sections 24-19.5-103(3) and 29-11.5-103(3) C.R.S. no seller or lessor in any sales or lease transaction or any company issuing credit or charge cards may impose a surcharge on a holder who elects to use a credit or charge card in lieu of payment by cash, check, or similar means.
In Connecticut, general statutes 42-13ff - Surcharge based on method of payment prohibited, states that no seller may impose a surcharge on a buyer who elects to use any method of payment, including, but not limited to, cash, check, credit card or electronic means, in any sales transaction.
The Florida Consumer Protection Statutes state that credit card transactions prohibit the seller or lessor from imposing surcharges on buyers who elect to use a credit card in lieu of other payment methods.
In Kansas, no seller or lessor in any sales or lease transaction, or any credit or debit card issuer, may impose a surcharge on a cardholder who elects to use a credit or debit card in lieu of payment by cash, check, or similar means.
The Maine consumer credit code has a credit and debit card surcharge prohibition where a seller in a sales transaction may not impose a surcharge on a cardholder who elects to use a credit card or debit card in lieu of payments by cash, check or similar means.
In Section 28A of the Massachusetts state law, it states that no seller in any sales transaction may impose a surcharge on a cardholder who elects to use a credit card in lieu of payment by cash, check or similar means.
New York’s general business law currently prohibits any seller in any sales transaction from imposing a surcharge on a holder who elects to use a credit card in lieu of payment by cash, check, or similar means. However, there is currently a case between merchants and the state that is contending this law that is worth paying attention to if you do business in the state.
Oklahoma’s Consumer Credit Code states that no seller in any sales transaction may impose a surcharge on a cardholder who elects to use a credit card or debit card in lieu of payment by cash, check or similar means.
The Texas Consumer Protection Division states that a business can not penalize you for paying with a credit card. Businesses that add a surcharge to those who pay by credit card might be violating provisions of the Texas Finance Code. The exception to this rule is that credit card fees can be charged by government entities, such as for the payment of property taxes or other fees required by government agencies.
The Legislature of Puerto Rico has enacted an act to establish the prohibition of the surcharge that is imposed in sale or lease transactions to those consumers who chose to use a credit card instead of cash, check or any other similar method or payment and to impose the corresponding sanctions.
What the Card Brands say about customer surcharges
In Canada, Visa has a Canada Service Fee Program Cap for card-absent transactions for specific merchant category codes including utilities, real estate agents and managers, post-secondary institutions, child care, fines and tax payments. For merchants in these categories, Visa allows a service fee of up to 1.5 percent for eligible debit transactions and up to 2.5 percent for eligible credit, prepaid and international card transactions.
According to the US Visa Rules section 220.127.116.11 US Credit Card Surcharge Requirements – US Region and US Territories, a merchant may assess a fixed or variable US Credit Card Surcharge on a Visa Credit Card Transaction, subject to applicable laws or regulations. The merchant may apply a surcharge on either the brand or the product level, but not both, and the surcharge needs to be collected in the transaction amount.
Mastercard includes details regarding charges to cardholders in section 5.11.2 of the MasterCard Rules. The general guideline for all merchants is that a merchant must not directly or indirectly require any Cardholder to pay a surcharge or any part of any merchant discount or any contemporaneous finance charge in connection with a transaction. However, they do all a merchant to provide a discount to its customers for cash payments.
There are modifications to this rule for the different countries Mastercard issues cards in. In Canada, MasterCard states that in addition to a discount for cash, a merchant may provide a discount to its customers for other forms of payment, including differential discounts for other payment brands. Such discounts must be clearly communicated at the point of interaction.
In the United States, the Mastercard guidelines for charges to Cardholders are more extensive than the Canadian guidelines and include rules for both brand level surcharges, which are the application of the same surcharge to all Mastercard Credit Card Transactions regardless of the issuer. In addition to product level surcharges, which are the application of the same surcharge to all Mastercard credit card transactions of the same product type regardless of the issuer.
For merchants based in the United States, Mastercard Surcharge rules also include:
- Disclosure of a surcharge at the point of interaction (POI)
- Notification and acquirer registration
- Transaction requirements
The American Express Canadian Merchant Policy includes rules for the treatment of the American Express Brand including:
- Merchants cannot indicate or imply that you prefer, directly or indirectly, any Other Payment Products over the AMEX Card
- Merchants cannot try to persuade or prompt Cardmembers to use any Other Payment Products or any other method of payment (e.g., payment by cheque)
- Merchants cannot impose any restrictions, conditions, disadvantages, or fees when the Card is accepted that are not imposed equally on all Other Payment Products, except for electronic funds transfer, cash or cheque
Accordingly, to the American Express Canadian Merchant Policy, merchants may offer discounts from their regular posted prices to prospective buyers for other methods of payments such as cash or by electronic funds transfer, cheque, or credit and debit products issued on other payment networks, if they clearly and conspicuously disclose the terms of the discount offer to all prospective buyers at the point of purchase or checkout.
American Express outlines detailed rules for merchants regarding the treatment of the American Express Brand in their US Merchant Policy. The rules are similar to the Canadian guidelines and include:
- Merchants cannot indicate or imply that they prefer, directly or indirectly, any Other Payment Products over our Card
- Merchants cannot try to persuade or prompt Cardmembers to use any Other Payment Products or any other method of payment (e.g., payment by check)
- Merchants cannot impose any restrictions, conditions, disadvantages, or fees when the Card is accepted that are not imposed equally on all Other Payment Products, except for electronic funds transfer, or cash and check
American Express does allow US merchants to offer discounts or in-kind incentives from their regular prices for payments in cash, ACH funds transfer, check, or debit card or credit/charge card, if:
- They clearly and conspicuously disclose the terms of the discount or in-kind incentive to their customers
- The discount or in-kind incentive is offered to all their prospective customers
- The discount or in-kind incentive does not differentiate on the basis of the Issuer or, except as expressly permitted by applicable state statute, payment card network (e.g., Visa, MasterCard, Discover, JCB, American Express)
Making sense of it all
Between the state or federal laws and the rules set out by the card brands, there is a lot of information to sift through related to surcharging customers that are paying by credit card. We have linked to the most recent documents available for your reference, but with several cases currently before the courts, we anticipate that additional changes and revisions will occur over time.
Beyond what the laws of the country you do business in say, and what the card networks outline in their agreements, it is worth considering the effect that adding a surcharge fee will have on your customer experience. Customers may feel negatively about their preferred payment method costing them more compared to other methods. The best way to counteract this and to avoid having to worry about surcharge fees at all is to shop around and educate yourself on the different payment processors available and how their fees work. This way you can select the best payment processor for your business. Choosing a payment processor who has fair and transparent fees ensures you can make strategic decisions for your business, while keeping your costs down, without having to worry about passing the fees on to customers.