What Is Credit
Many U.S. businesses are concerned about the cost of
accepting credit cards, which often requires a fee of around 2.7% per
transaction. Some businesses want to charge an extra fee to consumers to cover
this cost. This type of surcharge was prohibited by Visa and Mastercard until new
rules emerged in 2013 that allowed businesses to pass on the fees of accepting
credit cards to cardholders as a surcharge.
A surcharge is a fee added to the listed price for a good or
service when a credit card is used for the purchase (not a debit or prepaid
card). A surcharge cannot exceed the cost to accept credit cards, or the
surcharge cap of 4%. Surcharging can allow some businesses to have zero
processing costs for credit card purchases.
Why Do Businesses
Surcharge & What Does it Look like?
Recouping the fees for processing credit cards is the driver
for surcharging. The next two sections provide an example of what a typical
surcharge rate would be, and what a business might save if they implement surcharging.
What is the average surcharge rate?
As previously noted, a business must not apply a surcharge
that exceeds the cost to accept credit cards, making the surcharge “revenue
neutral.” According to The Strawhecker Group’s (TSG) Acquiring
Industry Metrics (AIM) platform, a business with ~$200,000 in annual credit
and debit card sales has an average cost of acceptance of 2.7% (though
surcharging can only be applied to credit card purchases). As such, in a
bundled pricing scenario, a surcharge of 2.7% allows a business this size to cover
their cost of credit card acceptance.
What is the average reduction in a business’s annual cost of
card acceptance due to surcharging?
Assuming at least half of a business’s sales are on credits
cards (which would be $100,000 per year using the insights above) and the business
paid 2.7% for card acceptance, the business paid ~$2,700 in fees for credit
card acceptance. If surcharging was appropriately applied to a business that
fit the figures listed above, that business could save an average of ~$2,700
What Does Surcharging Look Like?
For a surcharge, the listed sales price is the same as the
sales price charged, but at the register, the business charges an extra fee as
a surcharge for credit card transactions. This is called a “merchant fee.” The
surcharge must be shown on the receipt in dollars and cents. The table below
compares a transaction without a surcharge, and a transaction with a surcharge.
Example Credit Card Transaction Without a Surcharge Example Credit Card Transaction With a Surcharge
Merchant Fee (Surcharge): None
Merchant Fee (Surcharge): $2.70
Processing Fee (Discount Rate): 2.70%
Processing Fee (Discount Rate): 2.70%
Charged to Consumer: $100.00
Charged to Consumer: $102.70
Net Cost of
Acceptance to Business: $2.70
Net Cost of
Acceptance to Business: $0.00
to Business: $97.30
to Business: $100.00
For illustrative purposes only. There may be multiple variations and/or technical abilities when applying the merchant fee either before or after tax.
Managing Friction Points
A surcharge may cause friction among consumers, but certain
approaches could help. TSG’s Market
Intelligence team interviewed an owner of a small restaurant regarding
surcharging. The owner stated that surcharging would create an additional
friction point with customers that would need to be managed. The owner felt
that communication would be the hinge point for a successful surcharging program
and ensuring a consistent message from every employee would be necessary.
The following items outline possible consumer friction
points related to surcharging, as well as recommendations on how businesses can
handle these potential issues.
Friction Point: The Extra Cost for Using a Credit Card
Businesses should make the customer feel
empowered and help them understand why surcharging is being used. The message
to customers should be focused on how the customer benefits. The message should
be kept concise and informative. Customer interaction time is limited.Example: “If you pay with a debit card,
prepaid card or cash, there is no additional charge. If you pay with a credit
card, a merchant fee will be added to cover the cost of credit card acceptance.”For repeat customers, there will be an initial
education period; however, the need to continually educate regular customers
will decrease. For new customers, businesses should continue to
use consistent and concise messaging. Generally, as surcharging becomes a more common
practice, consumers will be become used to surcharging.
Friction Point: Surcharging Incorrectly
Some consumers may have experienced businesses
that did not following correct surcharging policy, such as applying an exorbitant
surcharge that surpasses the 4% cap or if surcharging was done on all payment
methods.Businesses should understand surcharging rules,
stay compliant, and educate their employees. (Businesses should refer to the Rules
& Regulations section of this article for more details and reach out to
their payment processing provider as needed).
Friction Point: Lack of Education & Signage
Poor communication on surcharging can cause
negative or incorrect assumptions. Transparent, consistent messaging is
critical. Businesses should create a standard, compliant message used by all
employees.Follow card brand signage and notification
rules. Signage can prepare consumers ahead of the transaction and can assist
employees with their communication efforts.Create a talk track for employees and train the
team to navigate conversations with customers – specifically around common
customer concerns or comments.Utilize multiple communication channels to share
and educate customers about surcharging – verbal, written, social media, website
and review sites, for example.If the initial messaging is not reducing
customer friction, adapt the message. Businesses should pivot until the
messaging is honed and suited to their specific customer base. Businesses know
their customers best.
Essentially, receiving an extra fee for paying with a credit
card is a main concern for consumers when it comes to surcharging. Businesses
should use clear, consistent, and frequent communication to educate consumers
and manage friction points early in the purchase process.
Regulations Around Surcharging
There are specific details from the card brands that dictate
how to surcharge compliantly:
A business must comply with federal and state
laws. Certain states have laws that limit or prohibit surcharging.The business must notify card brands 30 days
prior to implementing a surcharge.A business may only surcharge credit cards, not
debit or prepaid cards under any circumstance.A business must disclose the surcharge as a merchant
fee in all sales channels used (in-store, online, mail, phone and unattended). Customers must be notified of the surcharge at
the point of entry, point of sale or transaction, and on their receipt. The
card brands have very specific signage requirements around messaging, including
font type and font size, for example.The business must not apply a surcharge that
exceeds the cost to accept credit cards, making the surcharge “revenue neutral.” The surcharge may not exceed the surcharge
cap of 4%.The cost of accepting the credits cards is
considered the “merchant discount rate” which may not include all the fees
charged to the business.The business is responsible for calculating the
allowable surcharge amount and reviewing the surcharge rate periodically to
ensure compliance.Surcharging is allowed across all business types.
State-by-State and Some States have Limitations.
Ten states have laws that limit surcharging; however, these
laws were declared unconstitutional or deemed unenforceable in three of these
states. This landscape will likely further change and/or become more nuanced. Businesses
in these states should learn more about the limits that have been applied to
States that Limit or Regulate Surcharging
States that Require Additional Disclosures
States that have “No Surcharge” Laws that were Declared
Unconstitutional or Deemed Unenforceable
Whether or not to surcharge is an individual decision that
needs to be evaluated carefully by any business considering this type of program.
Businesses need to think about the impact to their operation; financially, and on
A business needs to conduct its due diligence by reading and understanding the federal and state laws and card brand rules. A business that has conducted their due diligence and decides to surcharge should also find a trusted payment processing partner that will help them implement a compliant program. A reputable payments partner is critical.
Sources: TSG’s institutional knowledge, research, and analysis, TSG’s AIM database of 3.7 million card-accepting businesses, small business interview, Visa, Mastercard