Surcharge programs are increasingly in the spotlight as merchants search for ways to offset their heavy credit card processing fees. These fees — often between 1.3% and 3.4% for every credit card transaction — nibble away at revenue to the tune of thousands each year. Before business owners know it, they’re out $20,000 simply because they accept credit cards! Enter surcharge programs. Imposing a surcharge means that customers bear the financial burden if they want to pay with a credit card. But is a surcharge program right for your business? We’ve got answers. In this guide, we’ll cover everything you need to know, including:

  • What is a surcharge program?
  • How do credit card surcharges benefit your business?
  • Are credit surcharge programs legal?
  • Credit card surcharge program rules and best practices
  • How to set up a credit card surcharge program
  • Best practices to introduce a credit surcharge

Let’s dive in.

What Is a Surcharge Program?

A surcharge, sometimes called a checkout fee or service fee, is an additional fee that merchants can tack onto a customer’s bill to cover the costs of credit card processing. Usually, merchants absorb this expense. But with a surcharge program, customers pay for the convenience of using their credit card. At checkout, your customers are presented with a choice:

  • They can pay with credit and accept the extra fee (a surcharge can be equal to your effective rate for credit card transactions, but no more than 4% per transaction).
  • Or, they can pay with cash or debit and avoid the fee altogether.

That leads us to something else important: It’s only legal to add a surcharge to purchases made with a credit card. You can’t legally add an extra charge to debit card, cash, or check transactions to cover processing costs. You can only charge the stated price of your service or product. (We’ll dive deeper into surcharging rules and legality later!)

Surcharge Programs vs. Cash Discount Programs

If some of this is sounding familiar, you may be thinking of cash discounting. In a cash discount program, merchants give discounts to customers who pay with cash, debit, or check instead of charging a fee to customers who pay with credit. The amount of the discount is usually equal to the merchant’s credit card processing rate, like 2.9%. The main difference is that surcharges discourage customers from paying with a card by charging a fee, while cash discounts encourage customers to pay with other methods by offering a small discount.

How Do Credit Card Surcharges Benefit Your Business?

What is a surcharge: A receptionist works at a desk in an office

Businesses are frequently weighing options to lower their credit card processing expenses and to give their profits a boost. They may set a credit card minimum, raise prices, negotiate with their payment processor, or go looking for a new processor entirely. Some of those strategies work better than others. But here are three clear-cut ways surcharge programs could benefit your business:

They Offer a Fast, Effortless Revenue Boost

Surcharging allows merchants to take back the revenue lost to credit card processing costs. To understand the significance of the savings, let’s look at an example. Let’s say your eyecare clinic collects most of its revenue in two ways: $460,000 from medical insurer payments and $300,000 from credit card payments. On average, your clinic pays a 4% processing rate. That means you’re losing $12,000 each year to fees. Covering those costs with a small 4% surcharge puts over $10,000 back in your pocket on an annual basis.

They Lower Your Operating Costs

Surcharging programs are sometimes referred to as “free credit card processing” because they all but eliminate the expense of accepting credit cards. Beyond the daily savings, surcharges could be a lifeline to businesses struggling to stay afloat in times of economic hardship and uncertainty. For instance, small business revenue dropped 52% and payroll expenses dropped 54% in response to the COVID-19 pandemic and shutdown. Adding this small, additional cost to customers’ credit transactions can help businesses respond to a sudden lack of revenue without increasing their pricing and upsetting customers.

They Strengthen Businesses With Low Average Transaction Values

In industries that rely on low-price, high-volume purchases or small average order values (AOVs) — like restaurants and bars, convenience stores, and certain retailers — it can be challenging to make a profit on credit card transactions. Passing these fees along relieves financial pressure so businesses can focus on increasing purchases or raising their AOV. As you can see, there are many reasons a surcharge program could be a smart move. For many businesses, their annual savings will speak for themselves.

Are credit surcharge programs legal?

Yes, in most states. It all depends on where your business is located. As of early 2021, one U.S. territory and three states don’t allow credit card surcharges:

  • Puerto Rico
  • Colorado
  • Connecticut
  • Massachusetts

If you operate in multiple states, you can still surcharge credit transactions, but only in the states where it’s permitted. Even though credit card surcharges are legal, you may be wondering how customers will react to the additional cost. Will it make them spend less? Switch to a competitor? Accuse you of trying to overcharge them?Not really. Customers aren’t completely unfamiliar with surcharging. In the U.S., many small businesses extend lower prices to customers who are willing to pay in cash. For instance, gas stations regularly put fuel surcharges in place. As long as you’re transparent with your customers, they’ll understand that they can continue to pay with a debit card and cash or support your business with a small credit card fee.

Credit Card Surcharge Program Rules

A stack of credit cards

The subject of surcharging can seem complicated, but handling it properly comes down to a few important rules.

  1. You must register with the major card brands. You’ll have to send written notice to card brands like Mastercard, Visa, and Discover so they know that you’re imposing a surcharge on customers using their cards. American Express doesn’t require this. (And by the way, Nadapayments will handle this registration and setup for you.)
  2. Your surcharge can’t exceed 4% per transaction. Merchants can’t profit from this fee — it’s all about recouping processing costs. For example, if your customer pays $1,000 for dental fillings, the surcharge fee is capped at $40.
  3. You must make your customers aware of any surcharge fees. Merchants are required to use clear signage at their point of sale (POS) as well as their store entrance or online checkout page.
  4. Your receipts must show the credit card surcharge as a separate line item. You’re required to process the product or service price and the credit card fee on the same invoice but have two separate line items for each. That way, customers can clearly see and understand the individual charges.
  5. You can’t add surcharges to debit card payments. Surcharge programs are only for credit card purchases. You’ll have to cover the cost of debit card transactions, but there's goods news: It’s usually much lower than credit card rates. For instance, with the Nadapayments surcharge program, you only pay 1% plus $0.25 per transaction.

You don’t have to navigate these rules and legal considerations alone. We’ve done our homework at Nadapayments, staying up to date with changing surcharge rules so you can experience free credit card processing with peace of mind. You can confirm that your state is eligible and get answers to other FAQs on our Rules for Surcharging page.

Setting Up a Credit Card Surcharge Program

One of the best things about starting a surcharge program is that it’s uncomplicated. Here’s an overview of the process.

1. Shop for the Right Merchant Service Provider

First, you’ll need to go comparison shopping for the right merchant service provider (MSP). They’ll help you open a merchant account to accept credit card payments, if you aren’t already, and then get your business set up with surcharging. Here are some qualities of a top-notch MSP:

  • The latest in credit card processing technology
  • Experience with your particular industry or vertical
  • Excellent customer service, including 24/7 technical support
  • Five-star reviews from satisfied customers

Once you’ve found a stellar MSP, the bulk of the work is done.

2. Launch Your Credit Surcharge Program

The next and final step? Activate your surcharge program! At Nadapayments, we believe that your revenue belongs to you — not the credit card companies. We’ll help you select the right array of surcharging equipment and comply with all surcharging rules, while providing you with 24/7/365 customer support. There are no setup fees or hidden costs, just transparent surcharging. If you’re ready to save thousands of dollars every year in processing fees, get in touch with us today.