Cardreader with itemized costs and surcharge fee listed. Prompt for customer to accept the cost of transaction or change payment method. Orange and pink gradient in the background.
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Can Businesses Charge Customers a Surcharge Fee?

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Ryleigh Stangness | October 7, 2022

“A guide to understanding surcharging for both U.S and Canadian merchants and whether it is right for your business. (Updated October 2022)”
11 min read
Content

    Surcharge fees, explained

    First, let’s define a surcharge fee: A surcharge fee is a fee charged by a business owner to cover the cost of a transaction when a customer pays via credit card.

    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 a 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 are not always practical.

    Note: Merchants can only use one 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.

    Read: Surcharge Fee vs. Convenience fees

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    Why has surcharging become legal in Canada?

    Canadian merchants plead their case to ease the burden of interchange rates (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 at the forefront of concern for Canadian business owners, with major brands like Mastercard adjusting their merchant rules, which could be a way to offset the cost of the credit card processing fees by offloading this cost to cardholders as an extra expense at checkout.

    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 ban credit card surcharges.

    States are adjusting their laws quickly, and the topic of surcharging has been heavily discussed. Colorado 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, which go into more detail, within the two states that still prohibit credit card surcharging.

    Connecticut

    In Connecticut, general states that surcharging based on the payment method is prohibited. “No seller may impose a surcharge on a buyer who elects to use any payment method, including, but not limited to, cash, check, credit card or electronic means, in any sales transaction.”

    Massachusetts

    Section 28A of the Massachusetts state law 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: What You Need To Know This October 2022

    While this controversial model has already been accepted by our U.S. neighbor for the most part, surcharges are new to Canada this October (2022). Consumer protection laws in Quebec mean that Quebec businesses are still ineligible to participate in surcharging but for other provinces, Both Visa and Mastercard have released detailed guidelines for how merchants should go about passing a surcharge on in their usage rules for merchants.

    We’ll give you the Cole’s notes in this article and save you a 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.

    Different states and provinces 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 October 2022 in Massachusetts, Connecticut, and Quebec.

    No cherry picking: equal surcharging across card brands

    Depending on your state or provincial laws, card network regulations, and payment processors, anti-competitive laws may state that you can’t discriminate against card brands or types. If you apply a surcharge, you must do so equally.

    For example, you may not be able to charge the processing cost for AMEX credit cards but not Visa.

    Generally, the easiest way for a merchant to get started in implementing surcharging is to have a uniform brand level surcharge and credit card surcharging for all credit card transactions.

    Merchants must disclose surcharge fees

    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 uses must 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.

    There are regulations around how you inform cardholders — surcharge fees should be 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.

    Different card brands have specific caps on how much you can charge — Mastercard and Visa websites state the maximum surcharge is 2.4% in Canada and 4% in the U.S. even when the merchant discount rate is higher — although some other card brands may differ. Merchants cannot charge more than their cost, so although they are capped at 2.4% for most card brands in Canada, and if the processing cost is 1.8%, for example, the merchant fees can only match that 1.8% cost. This can become complicated to calculate before you run a transaction without overcharging.

    Should you implement a surcharge at your business?

    Cardholder Impact

    For cardholders, surcharges are an extra fee on top of your checkout experience.

    “Pay to pay.”

    Sort of like asking for a tip on your bill, and this one is a predetermined rate. Many customers would rather have the tip worked into the pricing so they know how much they are paying upfront. Especially with other items like tax and GST, the total can start to irritate customers as it climbs away from the number of the price tag.

    In Canada, we’ve already begun to see the backlash from consumers towards companies like Telus, who have started implementing these charges on their clients.

    The impact on your checkout experience

    Many Canadian businesses have felt unfairly left out of the ability to surcharge, so this new legalization finally allows them to do that. However, in the U.S., where it has been legal in most states- many businesses still choose not to. Why is that? Perhaps because of the impact on their checkout experience. AMEX, for example, has stated they don’t agree with surcharging.

    “We don’t believe in surcharging our customers, and we’re working hard to educate businesses about the damage it can cause to customer satisfaction and loyalty. For us, the decision not to surcharge is an easy one; we’ve found no surcharge leads to a better customer experience, and that 93% of American Express Cardmembers would like to see them removed.”

    -American Express

    Some merchants accept credit card fees as the cost of doing business and are wary of adding additional fees after the price of a product, tax, and GST, and annoying loyal customers.

    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, which might help merchants to cut costs in the short term but might affect their customer loyalty and brand in the long run.

    Although merchants and customers may have mixed feelings surrounding surcharging, there are a few other things you should consider before jumping on the bandwagon:

    1. What does your checkout experience look like? Will this be a disruption? (You have to disclose the fee and ask them to agree) Will your customers be upset or willing to pay?

    2. There are rules and regulations to surcharging- are you willing to jump through the hoops to be able to charge your customers or are there simpler ways to compensate for credit card processing costs?

    3. What are other businesses in your industry doing? Will surcharging be considered the norm, or will you be unofficially boycotted from your target clientele

    4. Have you taken an honest assessment of your costs vs. the benefit of surcharging?

    Recouping merchant costs: Alternatives to surcharging

    Here are a few other ways merchants can make up the difference if you don’t want to go through the hassle and regulations of surcharging or decide it might not be best for your customer experience and a fit for your business.

    Adjust your pricing

    If a merchant chooses not to impose surcharges, they could still reflect this cost in product or service prices which many are already doing to cover the cost of business. Although arguably high in Canada, the cost of business has not changed, so businesses need to assess their current costs honestly- the in’s and out’s- and determine the best way to recoup or cut costs amidst a recession.

    Reconsider your payment processor

    It seems like an easy win to add a fee that is passed directly onto the customer- but what if there were other ways to save even more just by taking a second look at your processing costs? This would allow you to preserve the goodwill of your customers while cutting processing costs.

    Here are some guiding questions:

    What sort of pricing model are you processing with?

    Have you considered switching to interchange plus pricing as a means to cut down on processing costs and take advantage of the savings from lower interchange rates?

    Have you read your merchant statement lately?

    Merchant statements can be one of the ways payment processors intentionally hide fees or overwhelm you in an attempt to make you apathetic about your charges. You could be getting swindled on extra fees- here’s our guide to finding hidden fees and understanding where and what to look out for on your bill.

    Are you taking advantage of lower rates?

    Familiarize yourself with changes to interchange rates, or better yet, find a processor who informs you about those changes and how to take advantage of them. For example, using a recurring billing tool to get lower tokenized interchange rates on your transactions is a great way to cut down those processing costs.

    Offer a discount instead

    In Canada and the U.S., many merchants have worked out a loophole to fees and credit card surcharges and have been doing so for some time. Since Canadian merchants could not impose credit card surcharges until now, they often offered a discount to reduce the would-be-fee from the total as an incentive to pay with another method, such as cash or debit. Although, again, as we know, with surcharges, this discount cannot favor one card brand over another.

    Instead of imposing an extra charge which might be received poorly, merchants have already been accommodating for their costs of business through a friendlier discount equivalent to the cost of the fees, for using another method, such as cash.

    Striking a balance

    It’s impossible to determine the right call for every merchant and their business, as both options have weighted pros and cons. Merchants in Canada are pondering these same questions as the idea of surcharges in Canada has become a buzzword in the business world. Many wonder if it is suitable for them, what other merchants are currently doing, and whether surcharges are a good idea.

    FAQ's

    1. How much can a merchant charge for surcharge fees?

    There is usually a capped amount a merchant may issue to their customer for each card brand. Merchants can find this information by heading to the card brand's website and clicking through to rules and guidelines. Mastercard and Visa surcharge policies state 2.4% in Canada and 4% in the U.S.

    It can vary by card brand, so contact your payments company if you’re curious about other card brands your business accepts.

    2. 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.

    3. Can you surcharge debit cards?

    When paying by debit card (in the 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 Durbin Amendment).

    **Note: Canadian debit will be exempt from surcharges as it is different because of Interac (covered by a collective agreement between banks in Canada.)

    4. What type of cards and transactions can I surcharge?

    The rule of thumb is that businesses can add a surcharge to any credit card transaction, whether in-person, keyed-in (over the phone) or online.

    Canadian merchants can apply surcharges to credit card transactions in one of two ways: Brand level or product level surcharges.

    A brand level surcharge is applied to all cards of a particular brand, whereas product surcharges are applied to specific card types within a brand. Note: Merchants can only implement one type —not both. Anti-competitive laws may impact how merchants can utilize these types of surcharging methods.

    5. Where can I find more details on the card-brand rules regarding surcharging?

    You can read more about Mastercard’s surcharge rules and Visa Surcharge FAQs here.

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