News > Passing on Credit Card Fees to Customers: Laws & Best Practices

Passing on Credit Card Fees to Customers: Laws & Best Practices

Small business owners who accept card payments for products or services may experience high costs from credit card fees. The high cost of credit card processing fees can hurt small businesses charging fair prices for goods or services. To reduce these fees, our team at Five Star Merchant Advocates can help negotiate lower processing fees without having to switch providers. When the processing fees are high, another option is to determine how to adjust prices of services or goods to accommodate these charges.

Is It Legal to Pass on Credit Card Fees to Customers?

In most states, it is legal to pass on credit card fees to customers. Up until 2013, most states did not allow for surcharges. According to the National Merchants Association, surcharges are legal under federal law.

Credit Card Surcharge Rules

Each credit card brand may have its own rules pertaining to credit card surcharges. Some examples from different credit card brands are discussed below.

Mastercard

Mastercard allows for two types of surcharges: a brand-level surcharge and a product-level surcharge. For a brand-level surcharge, merchants may charge the same percentage on all Mastercard credit cards. For a product-level surcharge, merchants may charge a surcharge based on a certain kind of Mastercard credit card. Mastercard also caps off the fee that a merchant can include as a surcharge. Their Maximum Surcharge Cap is 4%.

Visa

Merchants who plan to surcharge must notify Visa and their acquirer of the intent to surcharge 30 days prior to implementing a surcharge. They also limit surcharging to credit cards, so merchants cannot include surcharges for debit or prepaid card purchases. In addition, merchants must disclose the surcharge as a merchant fee. This should also be disclosed on every receipt in which the merchant fee applies.

Cash Discounting

Cash discounting incentivizes customers to use cash or check by offering a discount. This helps merchants avoid the high credit card processing fees. When merchants are able to, this is a great opportunity for merchants to reduce processing fees incurred over time, as those fees can add up quickly.

In one example, there are plenty of gas stations that offer cash discounting. You might notice the cash and card prices for gas as different dollar amounts. For merchants who want a cash discount, you can simply include a discounted price at the register for cash payers, as opposed to listing two different prices for cash and card.

Minimum Purchase Requirement

According to a law from the Federal Reserve, the minimum purchase requirement can be set as $10 or less. Merchants may require that customers spend up to a certain amount before they are able to pay with a credit card. This helps them reduce the amount of credit card transactions that can lead to higher processing fees. It works best for merchants who have low cost items of $10 or less to offer.

Merchants are able to set the minimum purchase requirement themselves, as long as it is $10 or less.

Convenience Fees

Convenience fees charged by businesses help cover the cost of paying processing fees for credit card companies. As opposed to a surcharge, convenience fees are charged any time there is a transaction, not just when a customer is using a credit card. These convenience fees are typically in place to cover the convenience of allowing customers to pay for goods or services a certain way. This fee is also used to help cover business costs associated with those goods or services.

How to Calculate a Credit Card Convenience Fee

To calculate a credit card convenience fee, merchants typically factor in the business costs associated with transactions. To do this, they will need to first know their average monthly sales per transaction type. From there, they can calculate a percentage rate for these transactions.

Best Practices for Passing on Credit Card Fees to Customers

When choosing a method to pass on credit card fees to customers, it’s important to understand the rules and regulations put forth by credit card brands. Always disclose these charges to customers at the point of sale and ensure that it is noted on the receipt as well. Transparency with these fees is key to ensuring that you are complying with state laws and credit card brand rules. If customers have questions about the charges, you should have a full understanding of the fees so you can be prepared to explain them.