Starting April 15th 2023, there will be a new change to Visa’s surcharge rule. This update is part of Visa’s rules for merchants, and it is important for businesses to understand these requirements to remain compliant. The Visa notice has stated that they are capping credit card surcharges to 3%, it was previously set at 4%. This means that business owners can now only put a maximum 3% charge per transaction. Many business owners are not happy about this new rule, because processing payments can become quite costly. Interchange rates, interchange fees, transaction fees, assessment fees, authorization fees are all costs that come along with charging a credit card. Card networks like Visa set the standards and regulations for surcharging and processing fees, so merchants must follow these guidelines to avoid penalties. Not to mention the cost of processing high-ticket transactions, accepting international payments or dealing with chargebacks. Its likely that some businesses credit card processing fees will exceed the 3% surcharge. This means that business owners will need to start footing more of the bill. These surcharges are reflected as an extra fee on the customer’s bill, increasing the total amount the customer pays.
So What is a Surcharge?
A processing fee is paid to the appropriate financial institution each time a merchant accepts and processes a credit card transaction. A credit card surcharge is a fee imposed by the merchant to cover some of the costs associated with payment processing. This fee can only be applied to certain card types, specifically credit cards—never debit cards, even if they are used like a credit card.
Surcharges were illegal up until 2013. The question of whether credit card surcharges are legal was addressed in a class action lawsuit that allowed businesses in numerous states in the U.S. to adopt surcharges in their operations. This lawsuit prompted a chain reaction in the years that followed, with other states supporting surcharging. Advocates of surcharging argue that anti-surcharging rules raise prices for all goods and services and, in some situations, may violate the First Amendment. Surcharging is now legal in all states except Connecticut and Massachusetts.
There are steps merchants must take in order to charge this fee. The charge must be clearly stated to your clients. You can’t hide it in lengthy text or in the fine print. In the past merchants had to register with Visa, telling them about their intent to have a surcharge fee. With the new change to the rules, merchants only need to notify their merchant acquirer 30 days in advance before they start surcharging.
Credit card surcharges and convenience fees are sometimes confused, yet there are significant differences between them. A convenience fee can be applied for both debit and credit card payments, and it simply indicates that the merchant accepts various payment methods for the convenience of the client. Surcharges are normally calculated as a percentage of the total payment when it comes to determining the cost. However, merchants can charge a fixed price instead. Convenience fees, on the other hand, are always a set rate.
Note: Merchants must ensure they comply with all applicable Visa surcharge rules and state laws, and provide clear disclosure to clients regarding any surcharges or convenience fees.
Credit Card Surcharge Laws
Credit card surcharge laws can be a complex maze for merchants to navigate, as they vary not only at the federal level but also from state to state. While credit card surcharges are legal in most states, merchants must pay close attention to both state laws and card brand rules, such as those set by Visa and Mastercard. These regulations are frequently updated, and what’s allowed in one state may be prohibited or restricted in another. For example, California has its own set of regulations regarding credit card surcharges, and merchants operating there must ensure they comply with these specific requirements to avoid non-compliance issues.
It’s essential for merchants to stay informed about the latest surcharge laws and card brand rules to avoid costly fines and penalties. Non-compliance with these regulations can result in significant fines, and in some cases, merchants may even lose their ability to process credit card transactions altogether. To remain compliant, merchants should regularly review the rules set by card brands and consult with their merchant account provider to ensure their surcharge practices align with both state and federal regulations. By staying proactive and informed, merchants can confidently implement a credit card surcharge program while minimizing the risk of violations and fines.
Card Surcharge Disclosure
Proper disclosure of credit card surcharges is not just a best practice—it’s a requirement. Merchants must clearly inform customers about any surcharge fees before a transaction is completed. This means the surcharge amount should be visible at the point of sale, whether in-store or online, and must be listed as a separate line item on the customer’s receipt. Transparency is key: customers should never be surprised by an additional fee after the fact.
To meet disclosure requirements, merchants can display clear signage at checkout, include surcharge details on invoices, and provide upfront notices on payment pages for online transactions. The surcharge amount must also stay within the allowed limit set by card brands like Visa and Mastercard. Failing to properly disclose surcharge fees can lead to fines, penalties, and even damage to your business’s reputation. By making surcharge information easy to find and understand, merchants not only comply with card surcharge regulations but also build trust with their customers.
How Does this Affect Small Businesses?
The payment processors are the ones who set up these surcharges for business owners. If you’re currently charging more than 3%, you should get in contact with your processor as soon as possible. The penalty for a violation of this new surcharge rule can be a fine anywhere from $5,000 to $25,000. In a worst case scenario, businesses that do not comply may get their credit card processing privilege’s revoked completely.
This whole new rule was put in place with cardholders’ best interest in mind. Making the maximum amount merchants are allowed to charge 3% instead of 4%, is to protect customers from being overcharged in unnecessary fees. This is following the trend of the Biden administration’s attempts of getting rid of “Junk Fees”. The Junk Fee Prevention Act is mainly pointed at ticketing sites but apply to many other businesses as well. There are exceptions to these general rules, allowing certain practices under specific circumstances. Have you recently tried buying a ticket to a concert or sporting event recently? The fees that these sites slap on right before you purchase are outrageous. These fees are typically not disclosed until the end. Between processing fees, delivery fees, facility fees, “just because we can” fees, people are paying more than half the cost of the ticket in fees.
When it comes to state laws, many states have updated their laws regarding surcharges, so the legality of surcharging can depend on where your business operates.
For mega businesses and large chains, these changes in fee rules aren’t significant enough to really affect their profitability. But small businesses will have a much harder time adjusting to these new rules. The type of company also affects how the rules apply, as different company structures and jurisdictions may have varying compliance requirements.
Customer Experience and Surcharging
When it comes to surcharging, customer experience should always be top of mind. While adding a surcharge can help offset credit card processing fees, it can also be perceived as an unwelcome additional fee by customers. This perception may discourage some customers from using their credit cards or even from making a purchase altogether. To strike the right balance, merchants should focus on clear communication and transparency, ensuring customers understand why the surcharge is being applied.
Offering alternatives, such as a cash discount program, can also help maintain a positive customer experience. By providing a discount for cash payments, merchants can reduce fees while giving customers a sense of choice and value. Additionally, using payment processing solutions that automatically detect debit and prepaid cards can help merchants avoid accidentally applying surcharges to transactions that are not eligible, ensuring compliance and a seamless checkout process.
Ultimately, prioritizing customer service, providing clear signage, and maintaining transparent pricing can help merchants implement a surcharge program without sacrificing customer loyalty. By focusing on the customer experience, businesses can continue to grow and thrive—even as they navigate the evolving landscape of credit card surcharges.
How Business Owners can Stay Profitable
To manage the new change in Visa’s surcharging rules, the question of how to continue being profitable is on the table. One way that merchants can offset the price of processing fees is starting a cash discount program at their business. People sometimes link cash discount programs with surcharging, which has led to much confusion. They are very similar but cash discount programs are legal in every state unlike surcharges. The concept of a merchant surcharge specifically refers to the additional fee added to a credit card transaction to recover processing costs, and is subject to specific Visa rules and regulations.
A “compliant cash discount program” means that a store must show two prices for an item: one price if you pay with cash or a store gift card, and another price if you pay with a credit card. The credit card price includes the extra costs that the store has to pay to process your card. If you pay with cash or a gift card, the price will be lower because the store doesn’t have to pay those extra fees.
The store must give you a clear receipt that shows how much the discount is or how much the fee would have been if you paid with a credit card, based on the transaction amount. This is legal as long as the store follows the rules. This is not the same as a credit card surcharge, where the store adds a fee on top of the credit card price. A cash discount program just lowers the price if you pay with cash or a gift card.
Cash discount programs are “non-compliant” when they post cash prices, but then add a fee at the point of sale. Doing that is a surcharge. There is a fine line between cash discount and surcharging but the differences do make a big difference. In most cases, surcharging is regulated and only allowed under certain conditions, while cash discount programs are more broadly permitted. In many cases, having a cash discount program can increase customer loyalty and create incentive to return to your business.
Merchants are subject to enforcement actions, including fines or penalties, if they do not comply with Visa surcharge rules and related regulations.
Setting up a Cash Discount Program at Your Business
If a cash discount program is sounding like the perfect solution to combat Visa’s new surcharge rule then you should consider starting one of your own. The payments industry has seen a rise in these programs as businesses look for ways to manage processing costs. Having a cash discount program can significantly lower your credit card processing fees and may even eliminate them all together.
At VMS all of our machines have the ability to be programed for a cash discount program. Depending on what POS device you already have, or who your payment processor is, the process of starting a cash discount program can be sort of a hassle. It’s also important to ensure PCI compliance when setting up your payment solutions to protect sensitive customer data. Merchants also have the option to apply surcharges at the brand level, allowing them to add fees across all transactions of a specific card brand, such as Visa. At VMS we do all the work for you!
If you’re interested in starting a cash discount program at your business, head to getvms.com or fill out the form below! You may also want to consult your card issuer to understand any specific requirements or compliance considerations before getting started.
