What Is Credit Card Surcharging? Advice for B2B Merchants

Many business-to-business (B2B) buyers prefer to pay by credit card for the convenience it affords, the opportunity to take advantage of rewards, and the cash flow benefits of being able to delay payment.

For B2B merchants, however, the sentiment is different. Credit cards are among the costliest payment methods to process, with credit card processing networks (like Visa and Mastercard) steadily increasing their fees. In 2020, credit cards were responsible for 75.7% of payment processing fees paid by US merchants, amounting to a cool $83.51 billion.

But, with online commerce only gaining in popularity—B2B ecommerce sales rose to $1.29 trillion in 2020—accepting credit cards is somewhat non-negotiable.

To avoid missing out on a substantial revenue stream by refusing credit cards altogether, merchants have a few options to reduce the cost of accepting credit cards:

• Increase their prices
• Offer cash discounts
• Add a convenience fee, or
• Add a credit card surcharge fee

In this blog, we’ll explain what credit card surcharging is (and what is a surcharge fee), credit card surcharging rules, and how to know if the practice is right for your business.

What is credit card surcharging?

To process credit card payments, card networks charge merchants around 1.3% to 3.5% of every transaction. This does not include the additional fees merchants will pay to their payment processor, which depends on the rate structure they have chosen (flat rate, interchange-plus, or tiered). Some businesses use a surcharge fee to offset these costs.

What is a surcharge fee?

Credit card surcharging is the practice of charging an additional fee to customers paying by credit card with the aim of offsetting processing costs. This is often in the form of an additional cost to the purchase, sometimes called a "convenience fee."

With credit card use being such a fixture of our increasingly digital marketplace, finding a way to reduce processing fees is a top priority for many merchants.

Other than a surcharge fee, another method merchants might use to recoup some of the costs of processing credit card transactions is introducing a convenience fee. Whereas a surcharge fee is based on a percentage of a customer’s transaction, a convenience fee is a fixed rate.

As with surcharges, the rules for credit card convenience fees vary by credit card network. Visa, for instance, allows merchants to charge a convenience fee for non-standard payments. This means merchants can charge a fee to accept payment methods that differ from what they typically accept (e.g., a customer paying online instead of via check or in person). Other credit card networks only allow government agencies and select businesses to add a convenience fee.

Merchants are allowed to require a minimum purchase amount to accept credit card payments, as long as it doesn’t surpass $10. They can’t, however, impose a maximum purchase amount for credit card transactions.

Some merchants will offer their customers discounts if they pay by debit or cash. Cash discounting is legal everywhere in the US, whereas credit card surcharging and convenience fees are not legal in every state.

Is credit card surcharging legal?

Until a class action lawsuit resolved in 2013 where merchants alleged the major card networks were charging exorbitant fees, credit card surcharging was not allowed in the US. Now, the practice is allowed in most states.

Credit card surcharge laws by state

Currently, surcharging is illegal in Colorado, Connecticut, Kansas, Maine, Massachusetts, and Oklahoma. California and New York also have laws limiting credit card surcharging, but these are not currently enforceable.

International credit card surcharge laws

Elsewhere in the world, except for Australia, Mexico, and New Zealand, credit card surcharging is not permitted.

If you do business in multiple states where surcharging laws vary, you can apply a surcharge in states where the practice is allowed. Each state has its own nuances when it comes to regulating surcharges, so it’s important to be aware of state requirements at each location where you intend to implement a surcharge.

Rules for credit card surcharging

Surcharging might be permitted in most US states, but there are several rules around the practice that merchants need to ensure they’re following.

1. You must notify the card brand and your merchant services provider prior to implementing a credit card surcharge

If you intend on surcharging your customers, you will need to notify the credit card networks you support and your merchant services provider well in advance. For all card brands—except for American Express—you’ll need to notify them in writing at least 30 days before you plan to start surcharging.

2. You must ensure the credit card surcharge is properly disclosed and your customers are aware of it

You must disclose the presence and amount of a surcharge fee to customers at the point of sale. For brick-and-mortar stores, this will mean including some form of signage at both your entrance and register. For ecommerce stores, this will mean including a statement on your checkout page.

If collecting on accounts receivable, you’ll want to communicate the presence and amount of the surcharge wherever you are directing customers to pay, such as an online payment portal. This should be clearly visible prior to customers inputting their card details.

You’ll also need to indicate the surcharge as a line item on customers’ receipts and in your accounting software.

3. You can’t profit from credit card surcharging

The cost of a surcharge can’t exceed 4% of the underlying transaction cost or your cost of acceptance per transaction—whichever is the lowest. This rule was put in place to ensure merchants can’t profit from the presence of a surcharge fee—they can only use it to cushion their margins by reducing their processing fees.

4. You can’t add a credit card surcharge for purchases using debit cards or prepaid cards

A credit card surcharge can’t be applied to payments made with a debit card or a prepaid card. Processing fees for debit payments are structured differently and are typically less costly to merchants than credit card payments.

5. You must surcharge at the card brand or product level

Both Visa and Mastercard state that you can apply a surcharge either at the brand level or at the product level—not both. A brand-level surcharge means you’re applying a surcharge in the same amount to all cards from that network. A product-level surcharge means you’re applying a surcharge to a particular type of card from that network (be it a traditional card, a rewards card, etc.).

The pros and cons of credit card surcharging

Credit card surcharging is especially appealing to small businesses, whose profits might otherwise take a hit from the high cost of accepting credit cards. During the onset of the COVID-19 pandemic, the ability to lower operating costs by implementing a surcharge was especially valuable.

Mid-size B2B businesses can also benefit from surcharging as a means of easing their transition to digital payments. These businesses typically deal in orders of larger value and stand to lose more to processing fees as a result.

But, with credit card surcharging comes the potential for a compromised customer experience. Not all customers will be willing to pay the additional fee. A study by American Express found that 78% of cardholders believe it’s unfair to charge customers a fee based on their preferred method of payment. 86% also said that if a business they frequent often were to start surcharging, they would likely take their business elsewhere.

On the flip side, as surcharging becomes more commonplace, customers are becoming more used to the practice and may be less turned off by it.

Is credit card surcharging right for your business?

When thinking about whether to implement a surcharge fee, here are a few things worth considering:

• Is your business in a highly competitive market? If the market you play in is highly competitive and your customers have strong substituting power, it’s unwise to start surcharging. If a customer doesn’t want to pay an additional fee, they’ll have no problem taking their business elsewhere.

• What payment methods do you primarily accept? If credit cards only represent a small portion of your accepted payment volume, then the potential savings from a surcharge fee are likely not worth the resulting impact on customer experience and loyalty.

• Do you operate in an industry with thin margins? Businesses in industries that have narrow profit margins (such as wholesale distributors) can greatly benefit from the opportunity to offset or reduce payment processing costs. You might also consider adding a surcharge only on select items with particularly low margins.

• Would your customers be open to a surcharge? If you have a strong customer base and find yourself in a market with minimal competition, then applying a surcharge might not have much of an effect on customer loyalty. For some customers, the benefits of paying by credit card outweigh the disadvantages of having to pay an additional fee. For example, for some businesses, corporate cards act as their operating line of credit. And now with small business loans in short supply, the working capital benefits these businesses gain from using credit cards could make them open to a potential surcharge. Before forging ahead with credit card surcharging, it’s a good idea to gauge your customers’ potential receptiveness to it.

• Could it be your payment processor that’s the problem? If credit card processing fees are hitting your business particularly hard, then it might be worth reevaluating your payment processor. If not offered by your current vendor, you would likely benefit from a processor that offers interchange optimization—the process of sending additional data with every transaction to the issuing bank in order to lower your interchange fees.

When you process payments through Versapay, because we integrate directly with your ERP, we can easily support Level 2 and Level 3 processing and save you up to 40% on your processing fees.

If you choose to add a surcharge, Versapay can support this by ensuring the surcharge is recorded and applied in your accounting system automatically.

Want to learn more about the ins and outs of credit card processing? Check out The Ultimate Guide to Credit Card Processing.