Surcharging is a practice that some merchants use to pass along credit card processing fees to their customers who pay by credit card. Depending on the merchant’s business, it can be an effective way of offsetting processing costs but there are specific rules that accompany all surcharging programs. These rules are designed to protect consumers, and they are taken very seriously by the credit card companies.
Visa and Mastercard have recently amped up enforcement of their surcharging rules by utilizing tactics such as secret shoppers to monitor adherence. Merchants that are found to be out of compliance face hefty fines – as much as $50,000 for a first offense.
To avoid penalties, below are the surcharging rules that all merchants must follow, regardless of size.
Merchants must submit a notification form to their processor and the credit card companies at least 30 days prior to implementing a surcharge program.
If you are a Wind River Financial customer, we work with you to complete the paperwork then register it with all the credit companies on your behalf. After that, we coordinate a go live and training date with you to walk through the steps associated with surcharging a transaction through your POS solution.
Signage must be clearly displayed so customers will know, in advance, that a surcharge will be imposed if they pay by a credit card. The specific requirement is to post signage at the entrances and all points of sale – including menus. You must allow customers to change their payment type at POS to avoid the surcharge. In addition, the surcharge amount must also be displayed as a separate line item on the customer’s receipt.
The customer notification surcharge rule applies to all transaction channels – including onsite, online, and on the phone. Even if your customers are only placing an order over the phone, you must inform them of the surcharge, so they are not surprised when they pick up and pay for their order.
The surcharge amount may not be greater than your current processing fees for the type of credit card being used – typically 2-3 percent. According to the rules, four precent is the maximum you can surcharge. Be aware that some credit card processors are increasing processing fees up to that maximum rate as a way to generate greater profits. Even though you’re not paying that higher fee, you probably don’t want your customers to be taken advantage of like that.
You may not surcharge a debit card or prepaid card transaction. Even if customers paying with a debit card choose the “Credit” option on the credit card terminal, you still are not allowed to impose a surcharge. This means you will need a method of distinguishing the type of card your customer is using at the point of purchase.
This is a rule that is technology-driven rather than merchant process-driven. But it is still a requirement of the credit card companies. As a result, merchants that surcharge are held responsible for making sure it is enabled and passed. Please be aware that not all POS software can do this. It’s wise to check with your credit card processor or the manufacturer of your equipment to ensure the surcharge indicator is being passed properly.
There may be laws specific to your state in terms of taxes on surcharge amounts, amount you can surcharge, and even the legality of surcharging. For example, there are laws prohibiting surcharging in Massachusetts and Maine. In Oklahoma, surcharging is limited to two percent. And, some states consider the surcharge amount as part of the gross receipts, therefore, subject to taxation.
The credit card companies are only monitoring for compliance with their surcharge rules and requirements. That said, it’s a good idea to check with your tax preparer or your legal counsel to make sure your program complies with your state’s laws too.
Related article: Is Surcharging a Disservice to Merchants?
If you’re currently contemplating a surcharge program, I encourage you to weigh the full impact it may have on your business. Below are some questions to consider.
Related video: Will Surcharging Help or Hurt My Business?
Remember, there are other options that can help you improve your margins and reduce costs. These include: a cash discount program for your customers, Level II or Level III processing, and making sure your processor isn’t tacking on a bunch of unnecessary fees.
If you determine surcharging is best for your business, keep an eye on the surcharge rules. It can save you a big expensive headache down the line.
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