Want to Have Customers Cover Payment Processing Fees? What You Need to Know About Credit Card Surcharging

Credit card surcharging is on the rise. Imposing a surcharge in a compliant manner is more than adding a fee at the point of sale. Below we review on a high level the legal and commercial considerations for merchants before they impose surcharges on customer credit card transactions.

Card Network Rules

Major card networks generally allow surcharges on credit card transactions in the United States, provided the merchants adhere to the card network rules. For example, Visa limits the maximum surcharge that can be charged on a Visa credit card to the lesser of 3% or the average merchant discount rate that a merchant pays its acquirer for the applicable credit card, and Mastercard imposes a surcharge limit of the lesser of 4% or the merchant’s average effective merchant discount rate that the merchant pays its acquirer for Mastercard credit acceptance. A merchant may impose a surcharge at either the brand level (all credit card transactions on a network) or product level, but not both (all transactions for the same type of product on a network).

In addition, a merchant should notify its acquirer at least 30 days prior to commencing surcharging; clearly disclose to customers that a surcharge will be imposed as a merchant fee and the amount or percentage for both online and in-person transactions; and limit surcharges to credit card transactions only.

State Laws

A number of states impose their own restrictions on credit card surcharging practices, and they vary by state. Some, such as Connecticut and Massachusetts, prohibit credit card surcharges altogether. Others, such as Colorado, impose a lower cap on credit card surcharges than what is allowed by the card networks. In states where surcharging is legal — e.g., New York —, there could be specific and strict disclosure and record-keeping requirements in place. Further, laws prohibiting or restricting credit card surcharges have been or will likely be challenged in court; and such laws may change, be repealed, or not be enforced as a result of the legal challenges. Therefore, merchants conducting business on a multistate basis should review the latest state laws carefully to ensure compliance in each jurisdiction.

Agreements With Payment Processors, Acquirers, and Financial Institution Partners

Despite permissibility under card networks and state or federal laws, a merchant’s ability to impose credit card surcharges may be limited by contractual terms between the merchant and its payment processors, acquiring banks, and/or program partners. In addition to confirming its surcharging practice is fully compliant with legal requirements under applicable laws and card network rules, a merchant should confirm with its payment processor and acquirer whether surcharging can be supported, and whether any additional requirements need to be satisfied. Moreover, some issuers prohibit their cobrand card partners from imposing surcharges on all credit cards issued by the issuers, which could effectively mean that such cobrand partners cannot assess any surcharge at all because they are generally not allowed to assess surcharges on cards issued by some banks but not others. Therefore, merchants should review any program agreement they have with financial institution partners to ensure surcharging will not violate such agreements and to confirm whether surcharge revenues need to be split with their partners. When negotiating these contracts, a merchant should consider how restrictive covenants may limit its flexibility to implement surcharges in the future or require surcharge revenues to be shared with partners, and how it should document such contractual restrictions so its business units are given sufficient notice of such restrictions.

Alternatives to Credit Card Surcharges and Other Considerations

Merchants may explore ways other than surcharging to lower their payment processing costs. For example, merchants are allowed to give cash discounts to customers who do not use cards. This could avoid jurisdiction- and network-specific analyses while enticing customers to use a lower-cost payment method. Card networks also allow merchants to charge customers a “convenience fee” for using cards if the card payment method is provided for convenience as an alternative payment channel outside the merchants’ customary payment channels. However, a convenience fee cannot be charged if the merchant operates exclusively online, which makes the fee less useful for e-commerce and fintech companies. Merchants that have a merchant category code for schools and colleges, courts, or government services, among other things, are allowed to charge a service fee.

Whether to impose credit card surcharges is a business question as much as a legal question. A business should carefully evaluate customer psychology, competitor practices, and its relationships with payment processors and financial partners. Customers may be less inclined to pursue a transaction if they perceive surcharges to be a disguised way to increase seller profitability, even as comparable goods or services without surcharges are available from other providers. Depending on each company’s clientele and circumstances, a merchant may decide that absorbing processing fees and increasing prices across the board provides more benefits in the long term.

Merchants that decide to assess credit card surcharges should ensure policies and procedures are in place to be fully compliant with various legal and contractual requirements. If you have any questions about credit card surcharging or would like to evaluate the legal requirements of surcharging in more detail, we would be happy to assist.

To discuss your questions about this Fintech Flash or other payment-related matters, please contact Sammy Tang at xtang@goodwinlaw.com or 212-459-7196. Sammy has extensive experience with payment product development and structuring; money transmitter licensing and compliance; payment network rules; user, business partner, and vendor contracts; transaction due diligence; bank partnership arrangements; and agency inquiries and investigations.

Goodwin’s Fintech group strategically leverages its regulatory, transactional, and litigation and enforcement practices to provide full-service support in every vertical of fintech and financial services, including lending, payments, alternative finance, deposits, brokerage and wealth management, digital currency and blockchain, and transactions, including bank partnerships and deal due diligence. Our team is led by partners Mike Whalen, Crystal Kaldjob, Kim Holzel, Alex Callen, Danielle Reyes, and Sammy Tang. The team represents one-third of the fintechs on Forbes’ Fintech 50 list and is highly ranked by Chambers and Legal 500.

This informational piece, which may be considered advertising under the ethical rules of certain jurisdictions, is provided on the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin or its lawyers. Prior results do not guarantee similar outcomes.