A Merchant’s Guide To Surcharging

It sounds like a new event at the next Olympics, but it is actually one of the more hotly debated business practices for merchants across all industries. Unless you run a cash-only moonshining business in the Appalachians, you are probably aware of the term “surcharging.”

Surcharging has caused plenty of confusion for a large number of merchants, as well as a growing number of disgruntled consumers. Let’s take a look at the practice of surcharging by starting with a definition of the business practice.

Definition of Surcharging

Also referred to as a checkout fee, a surcharge represents an extra fee that a merchant includes in a customer’s bill when the customer pays by using a credit card. Surcharging is allowed only for credit card transactions, not for debit card or prepaid card transactions. The practice of surcharging is hotly debated among merchants because of the disadvantages of implementing the business practice.

Pros and Cons of Surcharging

You would be hard-pressed to find one consumer that enjoys paying an additional fee for the processing of a credit card transaction. Many merchants state that hidden fees such as surcharges can turn customers against their businesses. However, surcharging is a tempting business practice to follow because of one important reason.

The Benefit of Surcharging

If you are a merchant who decided to pass on the cost of processing credit card transactions to your customers, then you have chosen to benefit from a larger sales margin. The fees credit card companies charge merchants to process credit card transactions can add up to represent a significant amount of money. This is especially true in an era when few customers pay for a product or a service with cash.

The bottom line is surcharging increases a merchant’s bottom line.

The Disadvantages of Surcharging

As a merchant, you understand that not all cards are created equal. Debit card transactions are a substantial percentage of overall transactions, which means your business pays the processing fees for debit card transactions. A Federal Reserve “Payment Study” conducted in 2016 concluded the debit cards “outpace” credit cards in terms of usage.

Another downside to surcharging is some states prohibit the business practice. If you operate a business in Kansas, Colorado, Connecticut, or Massachusetts, you are not allowed to add surcharges to customers’ bills. Some states recently overturned surcharging prohibitions, much to the chagrin of constituents. States like California and Oklahoma might go back to banning the practice of surcharging.

The last con of surcharging is simple to explain: Customer anger. As a merchant, you have to decide whether the extra credit card processing fees are worth losing customers. If you start slapping a processing fee on every credit card transaction, you run the risk of losing some of the loyal patrons of your business.

If you decide to add a surcharge for credit card transactions, then you have to decide whether you want to add a surcharge at the brand level or the product level.

The Differences Between Brand Level and Product Level Surcharges

Guidelines for Brand Level Surcharges

A brand level surcharge means the credit card transaction fee applied to the bills of customers must be the same for every credit card issuer. The surcharge cannot be more than four percent, and the surcharge cannot be more than what the merchant charges for discount rate for all cash transactions.

Guidelines for Product Level Surcharges

A product-level surcharge requires merchants to charge the same credit card processing fee for all credit card transactions used to purchase the same product. The product surcharge cannot be more than four percent, and the surcharge must remain the same or below the average discount rate applied for all cash transactions made to buy the same product.

The Importance of Disclosing a Surcharging Policy

Both Visa and Mastercard require merchants to disclose surcharging policies by providing at least 30 days advance notice to the credit card companies. Merchants must clearly disclose the terms of a surcharging policy, which means tucking the policy into the fine print of a transaction receipt does not meet the disclosure standards established by Visa and Mastercard. Clear disclosure must include the amount of the surcharge, as well as emphasizing the surcharge does not exceed the merchant’s discount rate for cash transactions.

Visa and Mastercard recently added another stipulation for merchants that requires them to send surcharge amounts to both credit card companies.

The Future of Surcharging

Merchants operating in the United States have always resented paying for the high cost of credit card transactions. In 2017, the United States Supreme Court issued a ruling that has made it easier for merchants to pass on the cost of processing credit card transactions to their customers. The ruling prompted both Visa and Mastercard to change their opposition to businesses adding surcharges to customer bills.

The question now is will merchants continue to offer discounts to customers that pay with cash or penalize customers that use credit cards by imposing a transaction processing surcharge? The answer is unclear, especially with some merchants moving to a strictly digital transaction platform because of the COVID-19 pandemic. If you are a merchant licensed to do business in the United States, you have to determine whether the risk of losing customers is worth the extra money generated by credit card surcharges.

There is also the question of the legal implications of surcharging. Just because the Supreme Court issued a favorable ruling in 2017 does not mean the court will not revisit the issue of surcharging in the near future. With growing consumer discontent leading to pressure applied to state judicial systems, the Supreme Court might revisit the issue of surcharging sooner than we think.