What is a Surcharge Fee? Everything Business Owners Need to Know

What is a Surcharge Fee? Everything Business Owners Need to Know

In today's digital-first era, businesses are always looking for new and affordable ways to streamline their operations and grow their profits online. Not as many business owners focus on optimizing in-person experiences anymore.

But if the pandemic taught us anything, it’s that people don’t want to be cooped up indoors for too long. Consumers still enjoy in-person shopping experiences, even if they can just buy those products online.

In fact, according to JLL research, U.S. retail foot traffic rose above pre-pandemic levels back in late 2020:

Suburban centers and malls are seeing more foot traffic than cities, a reversal of pre-pandemic trends (Source)

In other words, it pays to pay attention to your retail experience. This brings us to the main topic of this article: surcharge fees.

What is a surcharge fee, exactly?

To put it simply, a surcharge fee is an additional charge that a business applies to a transaction when a customer chooses to pay with a certain type of payment method, typically a credit card. 

You may have seen these fees yourself on your receipts, but not all businesses charge them. In fact, it’s safe to say that many businesses eligible to charge surcharge fees simply don’t do so.

What a credit card surcharge looks like (Source

While most business owners are curious about surcharges, they also don’t know what they don’t know. At Nadapayments, we hear variations of the following questions all the time:

“What does a ‘surcharge’ mean?”
“How do surcharge fees work?”
“Are credit card surcharges illegal?”

These questions keep countless business owners up at night because the laws surrounding surcharges have changed a lot since the 20th century, particularly in the past decade.

But here’s the good news: If you're a business owner looking to understand the ins and outs of surcharge fees and whether you should be charging them at your place of business, you've come to the right place. 

In this article, we'll explore everything you need to know about surcharge fees, including the different types of surcharges, their legality in each state, the best way to tell customers you’re going to start charging them, and the rules and regulations you need to follow in your store.

Types of surcharge fees

Businesses commonly use one of two main types of surcharge fees: percentage-based surcharges (the correct way to do credit card surcharges) and fixed-amount surcharges.

Percentage-based surcharges are calculated as a percentage of the transaction amount and are typically used when the processing fees vary based on the card type or the card network.

On the other hand, fixed-amount surcharges are a predetermined flat fee that is added to each transaction, regardless of the transaction amount. 

Flat-fee surcharges are often used when processing fees are consistent across all transactions, but this is almost never the case. 

So anytime you see something like a fixed credit card surcharge in store signage or on your receipt, it’s either a) illegal and the business owner doesn’t know or care, or b) it’s actually a commodity convenience fee the business is mislabeling as a surcharge.

 Read: What is a Commodity Surcharge? What Every Business Owner Needs to Know

Why businesses charge surcharge fees

The primary reason why businesses charge surcharge fees is to offset the costs associated with accepting credit card payments.

Whenever any customer pays with a credit card, the business incurs credit card processing fees that are charged by the card networks, such as Visa or Mastercard, and the payment processors, such as Square or PayPal. 

These fees can significantly eat into a business's profit margins, especially for small businesses with lower transaction volumes on top of already low profit margins.

By U.S. law, surcharge fees are now always the same percentage as whatever the credit card processing fee is for that transaction. The surcharge simply cancels out the processing fee.

In other words, the business doesn’t profit from the surcharge itself. But because the associated credit card processing fees have been passed onto the customer, well-run businesses can boost their profit margins while still offering the convenience of credit card payments.

Are credit card surcharges legal?

Great question. Here’s everything you need to know about the legality of credit card surcharges:

  1. Debit card surcharges are illegal everywhere in the States. No ifs, ands, or buts. They’re no good. You just can’t do it.
  1. Credit card surcharges are legal in 48 U.S. states. As of 2023, credit card sucharges are legal in every state except Connecticut and Massachusetts. If we’re counting U.S. territories, then surcharges are also no bueno in Puerto Rico.

But even if you’re a business owner located in one of these places, you can still charge a surcharge fee using a cash discount program. This is a fancy way of saying that you should implement an incentive system for customers to pay with cash vs. card.

  1. Surcharge fees must be equal to a transaction's credit card processing fee, which is always a percentage. A credit card surcharge cannot be a flat fee.

Notably, credit card processing fees are capped at 3% nationwide, so it's probably illegal if you ever see a “credit card surcharge” higher than that.

 Read: Are Credit Card Surcharges Illegal? Here's Everything You Need to Know

Rules for communicating surcharges to customers

Of course, it’s not enough to follow the above rules. There’s also a whole set of regulations for how you display surcharges in your store, on receipts, and how to calculate them.

  1. Customers must know about the surcharge before any transaction. This basically means that you have to prominently display signage in your store, usually in the storefront window and near the checkout counter. E-commerce websites must also have digital signage on their checkout pages.
Outdated signage from when credit card processing fees were above 3% (Source)

Rules and regulations for major credit card companies

Finally, credit card associations have their own rules and regulations for credit card surcharges. As an example, here are Visa’s surcharge rules.

  1. You must notify your card association and merchant services provider at least 30 days before you intend to add surcharges (unless it’s American Express).
  2. You must include surcharges on receipts as a separate line item. Surcharge fees must be listed in the network authorization request and settlement (unless it’s American Express).
  3. Surcharges must be calculated using compliant Point of Sale (PoS) technology. There’s a very reason that new PoS unicorns like Square are worth what they’re worth. To ensure that credit card surcharges are properly calculated and displayed on receipts, your PoS system must be able to handle that. If it can’t, then you need a new PoS.

How to add surcharges without losing customers

If you're thinking about adding credit card surcharges to keep more money in your pocket, then you need to make 1,000% sure that doing so won't upset or piss off your customers.

After all, most consumers have no idea how credit card processing works (or that you are paying a fee to begin with) so they probably won’t be too sympathetic. Instead, they’re likely to see the surcharge as an unwelcome additional expense.

Fortunately, including the proper signage is usually enough to satisfy most consumers, especially for lower-priced items. But there will always be those who don’t like it.

One effective way to lawfully and diplomatically add credit card surcharges to your place of business is by offering a cash discount (which we mentioned earlier) to customers who can pay with cash.

It’s a pretty simple concept in execution. Here’s a super-simple example:

  • You sell a $100 item in your store and your credit card processing fee is 3%. If a customer buys with a credit card, you pay a $3 fee, which means you only get $97 (in reality, you’ll get less than that because of the other fees you must pay).
  • When you add a 3% surcharge, credit card customers will have to pay $103. Many of them won’t care about it or even notice it, as a lot of people don’t look at their receipts. But for the ones that do look at their receipts and do care…
  • You offer a cash discount lower than the card processing fee. Say you have a 1% cash discount program. Now a customer paying with cash can buy that product for $99 instead of $103. And because you don’t have to pay the $3 processing fee, you’ll get an extra $2 in profit. Everyone wins.

Growing your profits, one transaction at a time

You're not alone if you feel like your head is spinning right now. Because the rules change every so often, credit card surcharges can be confusing even for business owners who have dealt with them for years.

But if you can only take away one thing from this article, it should be this: Whether you’re running a low-margin business, like a restaurant or auto-body shop, or one with high prices and margins, like a cosmetic surgery clinic, you shouldn’t have to pay credit card processing fees.

Think about how much they can really cut into your profits. Compare a 3% credit card processing fee on a $10 item, a $100 item, a $1,000 service, or a $10,000 procedure. That’s $0.30, $3, $30, or $300 in credit card processing fees!

Your business deserves better. You deserve better, too.

If you want to keep more of your hard-earned money in your pocket and bank account, then Nadapayments can help set you up with the signage and PoS you need to start charging credit card surcharges.

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Aleksey Nugid
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