A Merchant's Quick Guide to Credit Card Surcharging

By Kathryn Campbell

U.S. merchants pay the highest merchant fees in the world. Last year alone, merchants paid over $45 billion in fees. And even though technology is bringing down processing costs, interchange fees (the fees businesses pay to credit card companies), continue to go up. The average credit card transaction costs businesses somewhere between 2.5% and 4% per transaction.

Most businesses end up raising prices to cover this extra cost, which for many merchants has become the second-highest operating expense behind labor.

That brings us to credit card surcharging, the market’s latest answer to rising credit card merchant fees. A “surcharge” is an extra fee charged to the customer at the time of purchase to cover the merchant’s cost of processing the card.

After years of legal battles, surcharging rules for Visa and MasterCard were amended in January 2013. The new rules allow U.S. merchants to surcharge credit card transactions, so long as they comply with a long list of new rules. The practice of credit card surcharging and the rules that control it, though, still baffle a lot of merchants and business owners.

Here’s a quick guide to understanding credit card surcharging, so you can know if the practice is right for your business.

“Brand-Level” vs. “Product-Level” Surcharging

Merchants are permitted to surcharge at the “brand level” or at the “product level.” A brand-level surcharge applies the same surcharge to all credit card transactions for a particular brand (Visa or MasterCard). A product-level surcharge applies the surcharge to a particular type of Visa or MasterCard product (like Visa Signature or World MasterCard).

Surcharging at the product level is complicated and is not practical for most merchants. This article will only discuss the rules pertaining to brand-level surcharging, because that is what most businesses will be applying.

Surcharging All Transactions

Merchants have to surcharge all Visa and MasterCard credit card transactions – you can’t decide to surcharge some Visa credit card transactions and not others.

The surcharge can be expressed as a fixed dollar amount (e.g., $2.50 per transaction) or as a percentage (e.g., 2.50% per transaction). But the surcharge must be the same for all Visa and MasterCard transactions, regardless of whether the card is a rewards card or a non-rewards card.

Surcharge Caps

The surcharge amount can’t exceed the merchant’s average merchant fee, and it can never exceed 4% even if the merchant’s average merchant fee is greater than that. This prevents merchants from profiteering.

Debit Card Transactions

A merchant can’t surcharge debit card transactions. Many merchants believe that debit card transactions authorized by a signature are credit card transactions. This is not true. Debit cards can be authorized by a pin or by a signature and are still debit card transactions.

A merchant also cannot surcharge prepaid or gift card transactions.

Level Playing Field

A merchant that accepts American Express cannot surcharge Visa and MasterCard credit cards (unless and until American Express changes its rules).

A merchant that accepts Discover must surcharge Discover on the same terms that it surcharges Visa and MasterCard.

Disclosure

Merchants must disclose their surcharging practices to customers in three locations:

1. At the point of store entry, or for e-commerce merchants, on the first web page that references payments. Customers should be told that the merchant imposes a surcharge on credit cards, and the surcharge is not greater than the merchant’s cost of acceptance.

2. At the point of sale, or for e-commerce merchants, on the checkout webpage. Customers should be told that the merchant imposes a surcharge on credit cards, the surcharge is not greater than the merchant’s cost of acceptance of the credit card, and the amount of the surcharge.

3. Sales receipts must have separate line items with the surcharge amount.

Processing Requirements

Transactions with a surcharge must be processed as one transaction and must be assessed by the merchant and not by a third party. Credit card terminals must provide populate processing data fields containing the surcharge amount.

Notification

A merchant must notify its acquirer and Visa/MasterCard that it intends to surcharge. There is a 30-day waiting period after the notification before a merchant can start surcharging.

These are the basic rules surrounding credit card surcharging for merchants. Understanding these rules will hopefully dispel the confusion and myths surrounding this relatively new and commonly-misunderstood merchant payment practice.