Surcharging 101
Learn about how to compliantly recover credit card fees.
What is surcharging?
Surcharging shrinks the cost of credit card acceptance in two ways:
- Customers pay the fee instead of merchants.
- Some portion of customers switch to a no-surcharge alternative payment method that is cheaper for the merchant.
Technical Definition
Passing some or all your credit card fees on to the cardholder.
Practical Definition
Customer payment choice. Customers can choose to pay a fee to use their credit card or switch to an alternative payment method which has no surcharge.
It’s important to note that most businesses who compliantly surcharge only surcharge a portion of their payments. They typically only surcharge certain business segments, product lines, customer types, or payment channels.
How does surcharging impact my business?
Surcharging is more than just adding a fee to your credit card payments. It’s more like adding sales tax to your business. For many merchants, it’s a business improvement that must be implemented end-to-end.
For example, your sales team will need to talk to customers about payment options. Your collections team must properly disclose surcharges to customers. Your accounting team must account for the brand-new revenue item for federal/state tax and refunds. Your IT team may need to automate accounting reconciliation. And your legal team likely cares about the compliance risk you take.
What do merchants need to look out for when surcharging?
Merchants want to maximize the amount of fees recovered while avoiding compliance risk and maintaining customer satisfaction. This means merchants need a solution that provides both compliance and implementation.
As merchants evaluate solutions that offer compliance and help implement, they look for 4 things:
1
Compliance Indemnification
Fines for non-compliant surcharging can run into millions of dollars. State attorneys general and card networks heavily regulate and enforce compliance. As a result, the best solutions automate complex card and regional rules and indemnify you against any errors.
2
Assured Savings
Many surcharging systems come as add-on features from vendors that make money when fees go up. The best solutions are independent and only make money when merchant fees go down.
3
Seamlessness
Add surcharging to the payments systems you already use – don’t replace them.
4
Control
Choose exactly which customers get surcharged and when, like On Account vs. COD payments. Surcharge the whole or part of the precise card fee, and correctly handle refunds.
What do Acquiring Banks need to look out for when surcharging?
Acquiring Banks incur card network risk for their merchants’ non-compliant surcharges – even when the bank doesn’t know they’re happening. Banks need:
1
Compliance Indemnification
Contractually shifts risk away from the bank
2
Assured Savings
Integrates into any merchants’ payment channels
3
Seamlessness
Provides 24/7/365 auditing and monitoring
4
CONTROL
Full monetization opportunities unaffiliated with their payment processor to compensate for risk
What questions should I always ask when looking for a surcharging solution?
- Does the solution follow all rules and regulations from state/provincial/federal regulators AND card networks?
- Does the solution provider offer contractual indemnification against compliance risk for BOTH federal and state/provincial regulations AND card network rules?
- Does the solution let you keep your current payment providers and technology?
- Does the solution allow you to keep your payments costs on both credit and debit cards the same?
- How does the solution provider help you implement surcharging into your business?
- What is the provider’s support model regarding surcharging issues? For example, who answers my customer’s questions about my surcharge program? How will I know if a state law or card network rule changed?
- Can the solution offer Precise Surcharging, keeping your surcharge rate up to date with your true cost of credit card acceptance?
- Can the solution offer Selective Surcharging, so you can choose how and when surcharges appear while remaining compliant?
Key Rules and Regulations
Surcharging is highly regulated by over 67 governing bodies. Those include state, federal, and card network rules. Oftentimes these rules conflict with each other. Non-compliance is aggressively enforced with fines from state attorneys general and card networks. Some of the most critical and universal surcharging rules include:
The merchant must not profit on a surcharge.
A surcharge cannot exceed the cost of accepting credit cards, subject to card brand or state caps (typically 3% of the invoiced price).
The customer must be notified of the surcharge at multiple points before the transaction.
The customer must always be able to cancel a surcharged transaction. In some states, there must always be alternative payment options, like debit or ACH, that allow a customer to avoid the surcharge.
Surcharges cannot favor one card network or bank issuer over another. For example, you cannot surcharge American Express without also equally surcharging Visa and Mastercard.
Different states have different laws around surcharging, with some prohibiting surcharging entirely.
InterPayments Certified solution are compliant with all surcharging regulations.
Surcharging 101 and Beyond
Now that you understand the basics of surcharging, get into the details with higher-level topics
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Is Surcharging Right for Me?
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How to Calculate Surcharges
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Variable vs. Fixed Rate Surcharging
Most merchants exploring surcharging are unaware that variable-rate surcharging is an option. It’s understandable. Credit card surcharging regulations are numerous and complex. In short, two key rules determine much you can surcharge: 1) you can never profit from a credit card surcharge; 2) 3%…