Credit card surcharges are becoming more and more common both in-store and online as merchants look for ways to bolster profitability. But why do surcharges seem to have popped up so widely and suddenly over the past few years? The simple answer is that, until recently, merchants weren’t allowed to surcharge customers in most markets worldwide. Today, legislators and card companies recognize that it is often a necessary relief, and merchants are eagerly adopting the practice as a fast, easy way to nudge their margins in the right direction. But while surcharging is easy, it isn’t as simple as adding a fee at the checkout counter. There are rules and standards that dictate where, how, and when merchants can surcharge, and understanding them is crucial to both staying on the card companies’ good side and minimizing the impact on customer relationships. 


What is a Credit Card Surcharge?

A credit card surcharge is a markup added at the point of sale to help a merchant recoup the costs of transaction fees. 

Example: Bill’s Sporting Goods pays its acquirer a 2.0% transaction fee on credit card purchases. Every time a customer pays with a credit card, Bill’s Sporting Goods effectively loses two percent off the top of its margin. To compensate, the store levies a matching 2.0% fee at the point of sale.

Without surcharge: A customer buys a $100 pair of running shoes and is charged $100 at the POS. Bill’s Sporting Goods pays the acquirer $2, netting $98. 

With surcharge: A customer buys a $100 pair of running shoes and is charged $102 at the POS. Bill’s Sporting Goods pays the acquirer $2.04, netting $99.96 – effectively the full sticker price. 

It seems like a pretty good deal for the merchant, which begs the question: why aren’t credit card surcharges ubiquitous? The simple answer is that anything that drives up the end price of a purchase – even just by a few percent – has the potential to make a business less competitive. If Tom’s Sporting Goods across the street sells the same pair of shoes for the same price without the added fee, that represents a competitive advantage. 

With that being said, surcharging is becoming extremely popular in a variety of industries, and many consumers now accept them on everything from restaurant service to their monthly bills to professional invoices from doctors and lawyers.



Is Credit Card Surcharging Legal?

Generally, yes. Until recently, credit card surcharging was almost universally banned. But, today, surcharges are legal in most of the United States. While the list of states that don’t allow it is shrinking, the practice is still banned outright in:

  • Connecticut
  • Massachusetts
  • Puerto Rico. 

There are laws on the books limiting surcharges with varying degrees of effectiveness and enforceability in the following states:

  • California
  • Florida
  • Kansas
  • Maine
  • New York
  • Oklahoma
  • Texas
  • Utah

Some merchants in the states listed above still opt to surcharge under the umbrella of a 2017 United States Supreme Court Case that determined surcharging was protected under a merchant’s First Amendment rights. There are also potential alternatives merchants can opt for, including cash discounting and convenience fees. 

Credit card surcharging is also legal across Canada but is banned in the United Kingdom and the European Union on consumer card transactions. 


What are the Rules for Adding a Credit Card Surcharge?

There are a variety of rules merchants have to follow when adding a surcharge, covering everything from advanced notification to how much they charge to how they alert customers and more. It’s important merchants understand the rules surrounding surcharges, as failure to follow them represents non-compliance with card network standards and opens a merchant up to everything from monitoring to fines to denial of service.

30-Day Advanced Notification

Visa, Mastercard, and Discover all require merchants to provide formal written notice to both the card company and the merchant’s acquirer a minimum of 30 days in advance of starting to surcharge. All three provide simple notification forms merchants can fill out and submit online. American Express does not require any formal notification as long as merchants are fully compliant with all other surcharging requirements. 

Maximum Rates

Surcharges are limited to the discount rate for the card being charged, up to a maximum of 4.0% for U.S. merchants and 2.4% for Canadian merchants. For instance, if an American merchant pays 2.5% on Visa transactions, they can’t add a fee of 3.0% – they’re capped at the 2.5% they pay. Merchants can, however, opt to tack on a surcharge that’s less than their discount rate in an attempt to recoup some costs while still staying competitive. 

Another important rule governing surcharge caps is the requirement to charge all cards equally. For example, a merchant can’t surcharge Visas at 2.0% and Mastercards at 2.5%, even if their discount rates on the two card brands are different. While merchants can choose to surcharge certain card brands and not others, they can’t apply different rates from brand to brand. 

Limitations on Payment Card Types

Surcharges can only be levied on credit card transactions. Surcharging on debit transactions is not allowed, including branded cards like Visa Debit and Debit Mastercard. This is an important distinction, as merchants still pay interchange rates on debit transactions, and may be naturally inclined to simply surcharge all card transactions. But charging debit and prepaid card purchases not only runs afoul of the card networks’ published rules, it’s also illegal in the U.S. 

Clear Customer Surcharge Notification

As a consumer protection measure, surcharges must be clearly displayed both at the point of sale and on a customer’s receipt. Clear notification of surcharges prior to and after a transaction is not only the law, it’s also good business. Ringing up a customer and presenting a number that doesn’t add up or is higher than they’d expected is a great way to burn up trust quickly. So, in a way, clear notification requirements don’t just protect consumers; they protect merchants, as well. 


Surcharging Education Should be a Priority for ISOs

With consumers increasingly turning to plastic in the wake of the pandemic, more and more merchants are starting to notice the impact transaction fees have on profitability. It’s in every ISO’s best interests to ensure any of their merchants looking for ways to offset fees know how to do it legally and within the scope of the rules set out by the major card brands. While advanced acquirer notification is part of the surcharging process, ISOs should take a proactive approach to surcharging and offer merchants education and guidance on its benefits, drawbacks, and requirements. 

Establishing a clear dialogue with merchants through educational materials, newsletters, or one-on-one conversations is a great way to minimize the potential impacts of non-compliant surcharging programs. Advanced reporting tools like IRIS CRM can also make it possible to catch sudden and consistent increases in a merchant’s processed transaction, helping ISOs catch merchants that have started surcharging without providing proper notification. 

To find out more about IRIS CRM’s advanced reporting dashboard and its full suite of ISO-enabling tools, schedule a free guided demonstration of the platform today.