How & Why Merchants Surcharge a Credit Card Transaction?

Colorado recently passed a law to change the state’s rules regarding surcharging. Previously, surcharges were banned in Colorado, just as in most other states. However, when the imposed changes to Colorado Revised Statute 5-2-212 come into effect in July 2022, merchants in the state will again be able to add fees to sale and lease transactions when processed via credit card. These changes, along with repealed surcharging bans in many other states, have the payment processing industry buzzing and merchants across the country wondering how it affects their business.

Below, we’re discussing what you need to know about surcharging, including what changes to expect as surcharging laws change and how surcharges affect your consumers.

What is a Surcharge?

Surcharges are fees that are tacked onto consumer purchases when they pay with a credit card. These fees aren’t charged by every merchant and typically they range from 1% to 3% of the transaction. In some cases, merchants may charge a flat rate instead of a percentage of the total transaction. These charges are normally in place to cover processing charges that merchants are required to pay to their payment processor.

Regulations and Laws Surrounding Credit Card Surcharges

In several states, it was illegal to charge a surcharge for processing credit card payments until recently. That includes Colorado, as well as California, Texas, Oklahoma, and Florida. But in 2017, the Supreme Court ruled that surcharge bans restricted merchants’ constitutionally protected speech, making state surcharge laws invalid. However, some states continued imposing surcharge bands for months and even years after, and as of July 9, 2021, only two states continue to ban surcharging: Connecticut and Massachusetts. Throughout other states, though, surcharging is legal — providing merchants follow state and federal guidelines that are in place to protect consumers.

While surcharging laws vary by state, each merchant is required to abide by terms laid out in their agreements with Mastercard, Visa, Amex, and other credit card issuers. Additionally, federal regulations stipulate the following:

• Merchants must clearly disclose information regarding surcharges before processing a transaction for a customer
• All surcharges must be clearly indicated on receipts
• Surcharges are only allowed for credit card transactions — debit cards may not be subject to any surcharges
• Surcharges may not be more than 4% of the transaction or the total fee the merchant pays to the credit card company (whichever number is less)

While it’s not federal law, Visa and Mastercard also require merchants to provide them with 30 days notice prior to implementing surcharges.

Minimum Purchases

In addition to surcharges, merchants have the right to set minimum purchase amounts for credit card transactions. By law, this minimum can not exceed $10.

Benefits and Drawbacks of Surcharging for Merchants

As a merchant, the passing of laws that allow surcharging can be incredibly beneficial. The most notable benefit is a reduction in operating expenses. By passing credit card fees to the customer, merchants are likely to notice a considerable change in processing expenditures.

Of course, adding a surcharge to credit card transactions comes with its drawbacks, as well. First and foremost, customers are sometimes offended by the addition of a surcharge when paying by credit card and for some, that could result in a lack of repeat business. Additionally, some industries with complicated billing processes — particularly those that rely on payments from insurance, might find that surcharging overcomplicates the payment process.

What Consumers Can Expect From Changes to Surcharge Laws

Consumers aren’t likely to notice much difference when it comes to these changes. While some retailers may begin imposing nominal charges when paying by credit card, others are likely to continue operating normally. In most cases, fees are imposed by smaller retailers that offer low-cost items, such as groceries and convenience items. However, it’s important for consumers to be aware of these changes and to be diligent when shopping to ensure they understand what they’re billed for and how much.