What to know before you charge
Mention the word “surcharge” around merchants or service providers, and you might get confused faces and blank stares. There may be a bit of mystery that surrounds this concept, so our partners at Fortis have put together a list of questions they hear the most from merchants in regard to surcharges.
Let’s start with the basics — What exactly is a surcharge?
A surcharge is an optional fee that a merchant or service provider can add to a customer’s bill when a credit card is used. The point of the surcharge is to indirectly pass the credit card processing cost of the transaction on to the consumer.
Are surcharges legal?
Unless restricted by state law, surcharges are legal in the United States. The following states prohibit surcharges or restrict the use of the surcharge: California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma, and Texas. If surcharging customers in Maine or New York, the merchant must post the cost of paying by cash, and the cost of paying by card, either on the invoice, or posted in the venue. Surcharges also cannot be charged in Puerto Rico.
In the states where surcharging is legal, are there rules a merchant must follow?
Before charging a surcharge, a merchant or service provider must comply with all the state and federal regulations including the following:
- The customer must be provided full transparency of the charges they are billed.
- Merchants/service providers must display a notice of the surcharge both in-store or if a service, within the office, and also online.
- Surcharges must be registered with the merchant’s payment network.
- The customer’s receipt must indicate that a surcharge was added and show the amount of the surcharge.
How is the amount of a surcharge determined?
The amount of a surcharge is determined by a flat percentage of the total value of the sale. For example, if a customer pays $100 through the Fortis platform to a retailer, the merchant can charge the customer up to 4% (which is the maximum) of the total sale as the surcharge. In this case, the merchant charges 3%, which is added to the bill at the point-of-sale. The cost to the customer is now $103. As the payment provider, Fortis puts the $100 in the merchant’s bank and passes the $3 surcharge to merchant involved in the transaction.
Can a surcharge be charged on debit cards, prepaid debit cards and gift cards?
Surcharges cannot be placed on debit cards, prepaid debit cards or gift cards. Even if the customer has a bank debit/credit card and wants to use the credit card portion for payment, the payment can’t be taken because the card is also a debit card.
What is the difference between adding the surcharge at the product level or at the brand level?
When a surcharge is added, the service provider or merchant must decide if the charge will be added at the brand or product level. A brand level surcharge adds the same fee to all credit card transactions from the same payment network (i.e., Visa, Mastercard, etc.). A product level surcharge refers to a particular type of Visa or Mastercard the customer is using (i.e., Corporate, Business Rewards, etc.)
Can a merchant or provider start collecting surcharges anytime they want?
Before beginning to charge a surcharge to its customers, U.S. merchants must notify the card brands (Mastercard and Visa) and Fortis, or another payment company that is managing payments for the merchant. This is done by submitting a notification form to the card brands approximately 30 days before starting the surcharge.
Can a customer still use cash?
Cash is not as popular as it has been in the past. These days most people don’t carry around cash but have their credit cards or digital wallets close at hand. Before agreeing to a surcharge program, review your customer demographic and take that into consideration when thinking of a surcharge program.
How does a payment platform like Fortis work with surcharging?
When a service provider or merchant partners with Fortis, this allows Fortis to enable its Lockstep surcharging feature within its platform an add a percentage of the sale into the transaction amount. The Lockstep surcharging feature complies with Visa’s and Mastercard’s rules that refer to clearly disclosing the surcharge fee at the time of payment.
With Fortis as its payment partner, customers can also choose to pay using a credit card and/or ACH. The surcharge fees will vary depending on the method of payment used. Fortis merchants can leverage the surcharge option in order to pass the cost of credit card processing fees back on to the customer. This process is gaining popularity. Whether or not to implement surcharging in your business will take careful consideration and review. Ask yourself and colleagues the following questions:
- Will we lose customers because of the fee?
- Do our direct competitors have a similar program?
- Can our customer easily purchase the same product from a competitor at a lower cost?
Are ACH charges lower than credit card fees?
Other ways to pay, such as an ACH bank draft, is also a great way to offset the cost of credit card fees. The cost of accepting an ACH transaction is generally lower than a credit card. Implementing business policies around sale amount thresholds for credit card payments and steering larger sales to an ACH payment is a great way to reduce overall processing fees.
Is there a downside to charging a surcharge?
Before choosing to surcharge, a merchant or provider should answer the following questions:
- Will charging a surcharge have a negative impact on my customers’ experience?
- Is my competition charging a surcharge? If not, how does my customer weigh the difference between us?
- Will I lose customers because of the fee?
Can a merchant choose to only surcharge Visa credit cards and not surcharge other card brands?
Yes, however, merchants must surcharge Visa on the same terms and conditions as any equal or higher cost competitor that imposes limits on surcharging. Please consult with legal counsel to determine whether your practices comply with relevant state law.
A merchant has stores in multiple states that allow surcharging, but also has stores in states that are prohibited from charging surcharges. Can the merchant surcharge those stores in the states that allow surcharging?
The card brand rules do not prevent a merchant with multiple stores to refrain from surcharging in states that allow the practice.
Can a merchant or provider charge a surcharge globally?
Visa’s rules relating to the surcharging of credit card purchases is made for the U.S. and U.S. territories only. Surcharging remains prohibited outside the U.S.
Overall, does surcharging help benefit a merchant’s or provider’s business?
Since the pandemic, merchants and customers alike have seen the rise in costs from everything from gas to groceries. It is during this state of inflation that merchants and providers see the surcharge as a means to bounce back. These is why merchants and providers are urging customers to pay by credit cards, and not just for the ability to use the surcharge. Customers paying by credit card will spend up to 83% more than a merchant or provider paying with cash.
Adding a surcharge to the cost of the sale is a great way for the merchant to increase their bottom line, especially with low margin industries. As goods, services, and labor increases due to inflation, surcharging is gaining in its popularity.
Fortis is an embedded commerce platform that integrates with Lockstep’s award-winning accounts receivable automation, Lockstep Receivables, allowing you to create customized payment experiences for your customers. If you’d like to learn about this Lockstep integration partner, reach out to a Fortis Guide.
Fortis delivers comprehensive payment solutions and commerce enablement to software partners and developers, processing billions of dollars annually. The company’s mission is to forge a holistic commerce experience, guiding businesses to reach uncharted growth and scale. As the solution of choice for the future of payments, Fortis moves commerce closer to invisible with a proprietary platform that supports and strengthens the commerce and payments capabilities of software partners.