Credit Card Surcharges Explained

The issue of credit card surcharges sparks confusion for both business owners and consumers. While business owners may want to pass on the cost of credit card transactions to their customers, it isn’t always legal or in the business’s best interests to do so.

Understanding the concept of a credit card surcharge, legalities, and alternatives for merchants is essential for making good decisions and ensuring the best customer experience.

Why Do Some Businesses Apply a Credit Card Surcharge?

Businesses add credit card surcharges to offset the costs associated with credit card processing. When customers pay with a credit card, businesses are subject to certain credit card fees from their bank or payment processor.

These fees typically include a fixed fee per transaction plus a percentage of the transaction amount. If the merchant has a payment processor, the transaction fees that the merchant pays will include the credit card interchange fees and assessment fees as well as the payment processor’s markup to cover merchant services and the payment gateway.

Surcharges are intended to cover these costs. The alternative is the business absorbing the costs; this can have a big impact on businesses with small profit margins.

What Is the Difference Between Credit Card Surcharges and Credit Card Convenience Fees?

A credit card surcharge is a charge that is added to every credit card transaction that a business processes. A credit card convenience fee, in contrast, is only charged in situations where credit card payments are considered “nonstandard.”

Both governments and credit card companies like Visa and Mastercard have rules concerning credit card surcharges and convenience fees. Merchants can generally set their fees within the parameters set by these bodies.

Are Credit Card Surcharges Legal?

In the European Union (EU), credit card surcharges are illegal. This includes all types of surcharges including credit card convenience fees. It’s also illegal for businesses in some European countries outside of the EU—like Switzerland and the United Kingdom—to impose surcharges on credit card purchases.

European businesses with branches in the U.S. will face different rules depending on the states where they operate. As of June 2024, surcharging is largely legal in the U.S. apart from in the following states where regulations apply:

• It’s illegal to impose credit card surcharges in Connecticut, Maine, Massachusetts, Oklahoma, and Puerto Rico.
• Merchants must follow certain requirements in Colorado, Minnesota, New Jersey, and New York. Regulations may be as simple as disclosing any surcharges customers are subject to, as is the case in New York State.

Check the credit card surcharge laws in the country or state where your business operates to ensure you stay compliant and avoid legal problems.

Things to Take into Account if You Apply Credit Card Surcharges

If you decide you want to introduce credit card surcharges in your business, you must find a way to strike a balance. Covering costs is important. However, you must also keep your customers happy. Tacking on new charges can come across as gratuitous and can risk negatively affecting customer satisfaction.

Consider these best practices for implementing a surcharge policy in your small or medium-sized business:

Ensure Transparent Communication

Transparency is the best policy when it comes to charging fees. Communicate any new charges clearly; this could be through signage, mentioning the new charges at the point of sale, or including a clearly visible statement on your website. Customers should be made aware of the surcharges before they complete their transaction.

Avoid Excessive Surcharging

Surcharges should cover your costs but not more. Don’t exceed the amount your credit card company charges you for your business transactions.

Educate Customer-Facing Staff

Bringing in new charges will require staff to explain the policy effectively. Ensure your staff can explain the policy clearly and answer customers’ questions.

Offer Multiple Payment Methods

Make sure you accept a variety of payment methods that don’t incur surcharges. This gives customers the option to choose if they want to pay the surcharge or not.

Analyse Customer Feedback

Listening to customer feedback is key when implementing any change in your business. If your surcharge policy caused measurable customer dissatisfaction, consider adjusting your strategy.

Disadvantages of Credit Card Surcharges

As a European business owner, you may feel disappointed that applying surcharges to offset processing fees is unlawful. However, your business may be dodging a bullet by not charging extra for credit card payments. This is because credit card surcharges have several significant downsides:

• Consumers will have a negative perception of credit card surcharges. Charging customers extra just to pay certainly isn’t a good look, even if you’re only doing it to keep your head above water. Customers may perceive that surcharges are only applied to increase profits. Business owners should reflect on how surcharges shape customer perception before applying any extra fees.

• Surcharges could put your business at a competitive disadvantage. Customers may prefer to buy from a business that doesn’t impose a surcharge over a similar business that does.

• Deciding to impose surcharges will require you to stay on top of complex laws surrounding their use. These regulations can change depending on the country or state you’re in or what the credit card network stipulates. Not following these rules could prove costly for your business.

Maintaining a faultless reputation within your industry must be a priority for small business owners. This is especially true because price increases (including additional charges) are within the control of the seller. Research shows that the consumer often perceives price increases to be unfair even if they are cost-justified. It may be best to avoid credit card surcharges altogether for that reason.

Processing credit card payments is simply one of the costs of doing business. The good news is that there are other ways to cover processing fees.

Alternatives to Credit Card Surcharges

For many businesses, charging credit card surcharges simply isn’t an option; for others, it may be an approach business owners prefer to avoid. However, the question of how to balance out credit card transaction fees remains. The following are a few options:

Raise Prices

Many small business owners may baulk at the thought of raising prices. However, the real question if you’re struggling to turn a profit isn’t if buthow to raise prices without losing customers.

You must find a balance between keeping yourself going and not pricing yourself out of the market. A small rise in prices—even as small as 1-2%—can go a long way towards fixing your profit margins.

Incentivise Alternative Payment Methods

Proceed with caution when incentivising your customers to use payment methods other than credit cards. Any encouragement to use another method can’t come in the form of a discount, as this would be construed as a surcharge on credit cards.

For example, streamlining the checkout process for other forms of payment could be an effective way to direct customers away from credit cards without adding method-specific discounts or charges.

Review Your Merchant Service Provider’s Fees

As a busy business owner, it may not occur to you to check if you’re being overcharged for payment processing services. Shop around for online payment processing solutions from experts who support small business growth and understand your industry.

For example, Unicorn Group offers some of the lowest industry rates and fees along with complete transparency about pricing and what is included. Our personalised transaction rates are customised to fit your business and includes advanced merchant tools and protection against fraud and chargebacks, which ultimately saves your business money.

Tread Carefully with Credit Card Surcharges

Imposing credit card surcharges can seem like a quick fix to plug the gap caused by credit card processing fees. However, there are other more effective and ethical ways to cover the costs of processing credit card payments in your business.

Ensuring your payment processing services are cost-effective for the features they include must be a priority for businesses looking to make savings where they can. Partner with a reputable payment processor with transparent pricing and merchant services that can help your business succeed.