Surcharge fees, explained
First, let’s define what a surcharge fee is: A surcharge fee is a fee charged by the merchant to cover the cost of the transaction when a customer conducts a credit card transaction.
When a merchant chooses to accept credit cards and process credit card transactions, there is a fee associated which has traditionally come out of the merchant’s pocket. With surcharges, also sometimes referred to as free or zero-fee credit card processing, the customer is prompted at the time of payment and given the choice to accept the surcharge fee for using a credit card or opt to use another form of payment.
There are two types of surcharges: Brand Level vs. Product Level Surcharges
- Brand level surcharge – surcharge applied to all cards of a certain brand.
- Product level surcharge – surcharge applied to certain card types within a brand. Product level surcharges are not easily understood by customers and not always practical.
- Note: Merchants can only use 1 type of surcharge (not both) and anti-competitive clauses may be in effect for various card brands which prohibit selective surcharging by brand or product and call for uniform charging across levels.
How do merchants and cardholders feel about surcharges?
When it comes to fees, it’s always a hard sell. It’s not unlike prying teeth to try to make credit card fees sound friendly, and unsurprisingly the jury is still out on surcharges.
Until recently (in Canada), every time you used a credit card to make a purchase, the merchant bore the cost of credit card processing, or interchange fees as part of the cost of business. So what’s changed?
Canadian merchants plead their case to ease the heavy burden of credit card fees (set by the card brands) that has cost merchants millions. Despite multiple deals with credit card-companies since 2020 that were meant to lower credit card fees (forecasted to save businesses over a quarter million per year), the increase in credit card transactions has meant increased fees, especially for smaller businesses.
Thus, the idea of surcharges has been mingling,with major brands like Mastercard adjusting their merchant rules as early as next October (2022) which would work to offset the cost of the credit card processing fees by offloading this cost to cardholders as an extra expense at checkout.
How will merchants feel about surcharging in Canada?
Since surcharging will be completely new to Canadians, it’s difficult to foretell how merchants and cardholders will feel. To establish a baseline, we conducted an internal survey here at Helcim and asked our U.S merchants. We received mixed results on surcharge fees; 54% of merchants were happy to include this cost, which they admitted made their business more efficient, while others were reluctant to surcharge their customers and preferred to include this cost as part of their own cost of doing business.
Surcharging in the United States- Not yet accepted everywhere
In the United States, card brands allow surcharges if you follow each card brand’s specific guidelines as outlined in their merchant agreement if your business does not operate in one of the states that have a ban on credit card surcharges. States are adjusting their laws quickly and the topic of surcharging is one that has been heavily discussed. Colorado just passed a new surcharge law in July of 2021 leaving only Massachusetts and Connecticut as the only states with surcharge bans. There are specific laws within the two states that prohibit credit card surcharging which go into more detail.
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.
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.
Surcharges in Canada: Coming to a store near you October 2022
While this will be new to Canada (October 2022) for the most part, this controversial model has already been accepted by our neighbor the United States (except for Massachusetts and Connecticut.) Outside of these two states, merchants can surcharge customers as long as they are following each credit card brand’s specific guidelines as outlined in their merchant agreement.
So what will surcharge fees look like In Canada? Both Visa and Mastercard have detailed guidelines for how merchants should go about passing a surcharge on in their usage rules for merchants, but we’ll give you the Cole’s notes in this article and save you the thorough read of all their terms and conditions.
Playing by the rules: How do surcharge fees work?
There are a few stipulations surcharges must follow. Below we will take a deep dive into the rules of the game.
Note: Different states have different laws so be sure to read up on your states legislation as well as the card brand rules to get a full understanding before implementing surcharges. Surcharges are currently illegal (as of February 2022) in Massachusetts and Connecticut.
Currently there are certain exceptions where merchants may charge a surcharge fee in Canada and rules surrounding each specific card brand, however it will not be legalized for most merchants until October 2022.
No cherry picking: equal surcharging across card brands
Anti-competitive laws state that you can’t discriminate against card brands or types. If you apply a surcharge, you must do so equally.
For example, you cannot charge the processing cost for AMEX credit cards and not Visa. You also cannot charge surcharges for one type of Visa card and not another.
There are certain nit-picky stipulations involved which may allow some wiggle room, but generally the easiest way for a merchant to get started in implementing surcharging in the US is to have a uniform brand level surcharge and credit card surcharging for all credit card transactions.
That said, certain brands may not allow surcharges, and since other brands require uniform surcharging, this may restrict you from imposing surcharges at all, which is something to consider when choosing to accept various credit cards.
Although you cannot cherry-pick between brands or card types, a merchant may choose to impose surcharges based on payment method in regards to in-person or online/ virtual payments. A merchant may choose to charge for either or both.
Merchants must disclose surcharge fees
In order to impose surcharge fees for credit card transactions, merchants must clearly disclose this to cardholders at the storefront and during the POS (point of sale) purchase (for both in-person or e-commerce transactions.) This means that the POS system the merchant is using must clearly display the surcharge fee as a separate item on the terminal or card reader and include the option to change payment methods or accept the credit card surcharge. Merchants must also specify at the storefront or on their online credit card brand page that their fee is not greater than their cost.
If a merchant fulfills these requirements, they are on their way to being eligible for surcharging. However, there are a few other things you should consider before diving in.
Can you surcharge debit cards?
When paying by debit card (U.S only) Visa debit will also incur a surcharge for online purchases. If you pay in person using your debit card it is supposed to be charged on the debit rails (according to the Derbin Amendment).
**Note: Surcharges are still illegal in Canada, however Canadian debit will be exempt from surcharges as it is different because of Interac (covered by a collective agreement between banks in Canada.)
So who really profits from surcharge fees?**
A win/ win for merchants and customers
While some merchants accept credit card fees as the cost of doing business, others are wary of adding additional fees after the cost of a product and annoying loyal customers. The reality is credit card processing is a win/win for both card holders and merchants alike but no one actually “profits.”
By accepting credit cards, merchants permit their customers more flexibility in their payment options while opening themselves up to more transactions. By imposing surcharges, they may be offloading the cost (or some of it) onto their customers, but this helps merchants to continue to accept credit cards without taking the hit.
Transparent processing fees**
To help mitigate this cost and inform cardholders, surcharge fees are calculated and presented at checkout as a separate cost in addition to the total. Merchants are mandated to provide a prompt to switch to an alternative payment method to mitigate this cost, or to inform customers who choose to accept it and continue to pay with their credit card. The surcharge fee must also be shown on the customer’s receipt as an itemized cost.
The cost of doing business: Recovering the merchant’s cost
It is worth noting that there is a cap on surcharge fees at a max of 4% even when the credit card fee is higher. Merchants cannot charge more than the cost, so although they are capped at 4%, if the processing cost is 1.8%, the merchant fees can only match that 1.8% cost.
Although merchants and customers may have mixed feelings surrounding surcharging, there are other ways merchants can make up the difference. For example, even if a merchant chooses not to impose surcharges, they may still be reflecting this cost in product or service prices.
Striking a balance
It’s impossible to say what the right call is for every merchant and their business, and there are viable pros and cons to both options. Merchants in Canada are pondering these same questions as the idea of surcharges in Canada has become a buzz word in the business world. Many are wondering what the laws and regulations would look like if surcharges were legalized, what merchants are currently doing and whether surcharges are a good idea.
What would credit card surcharges look like in Canada?
In Canada, cardholders have the added bonus of credit card rewards and cash-back so there is not only incentive to use credit cards more, but if credit card surcharges were to be legalized, there would be a sense of rebalancing at work that may help alleviate the cost passed.
In Canada and the U.S, many merchants have worked out a sort of loophole to fees and credit card surcharges. Since merchants cannot impose credit card surcharges they often offer a cash, or debit, discount, to reduce the would-be-fee from the total, as incentive to pay with another method. Although, again as we know with surcharges, this discount cannot unfairly favor one card brand over another.
Instead of a discount equivalent to the cost of the fees, for using another method such as cash, merchants would be more likely to remove this incentive (no cost savings for the cardholder) if credit card surcharges were introduced. Although the incentive of credit card rewards may be enough to entice cardholders to use a credit card anyway.
For the most part, surcharging is inaccessible to most merchants, however there are certain rules and regulations of each card brand that may provide an opportunity for merchants to pursue surcharges if they desire.
Here is a link to Mastercard’s guidelines for surcharges in Canada.
How much can a merchant charge for a surcharge fee?
While it may depend on the credit/ debit card brand specific rules and state laws, most brands, such as Mastercard have mandated a cap on the amount a merchant may surcharge to cover the cost of transaction or processing fees for credit cards. Defined as, “the average merchant discount rate that they pay for Mastercard credit card acceptance.” In other words, they can only charge the amount they themselves are being charged for the transaction and no more. In Canada, the cap for how much a merchant can charge for a surcharge amount is actually 2.4%, vs. 4% in the U.S regardless of the merchant cost. Surcharge caps and fees will vary by card brand, so it is worth brushing up on up to date information.
Mastercard Surcharge FAQ’s
- How much can a merchant charge for surcharge fees?
- There is usually a capped amount a merchant may issue to their customer. Merchants can find this information by heading to the card brand’s website and clicking through to rules and guidelines.
- What is the difference between convenience and surcharge fees?
- A convenience fee is a fee charged by a merchant in association with the payment method (keyed, online, in person). A surcharge fee, on the other hand, is only charged for a specific card type (such as credit card) but is removed if an alternative card type is chosen (such as debit card.) A merchant cannot charge both, only either or.
- Can a merchant charge a surcharge fee for the total cost of a credit card fee?
- While a merchant cannot charge more than the processing fee, they are also often capped at the amount they can recover from surcharge fees and can charge a maximum percentage even if the cost is higher.