What is Surcharging?

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A brief business guide to surcharging

There is often a lot of confusion among merchants over the topic of credit card surcharging and what implications it might create for their business. After all, it’s only natural to think that passing a credit card fee on to customers might decrease sales but at the same time, businesses have to manage their costs. What’s more, both online and brick-and-mortar merchants are often surprised at just how much credit card fees can cost.

This brief article demystifies surcharging, helping you to understand them much better and what it could mean for your business.

In this article:

  • What is surcharging?
  • Surcharging pros and cons
  • Setting up surcharges: merchant best practices
  • Should your business add surcharges? What to consider

What is surcharging exactly? A quick definition

A credit card surcharge is a percentage fee at checkout (that's paid by the end consumer) on eligible Visa, Mastercard, Discover and American Express Opt Blue credit card transactions. Surcharge fees are typically added to the final transaction total and itemised at checkout.

Surcharging is commonly used by businesses to process credit card and regulatory fees, although there are many other types of surcharge that businesses in different industries use. This article focuses only on credit card surcharges.

Absorbing credit card fees can seriously eat into your business’s profits. Moreover, regulation and credit card issuer fees can change. For these reasons, many businesses opt to pass the credit card processing fee onto the customer. Rather than merely raising prices to account for the fee, adding a surcharge enables your business to show customers exactly what it costs to use a credit card instead of other payment methods, such as cash or debit cards.


The benefits and drawbacks of surcharging

If you’re thinking of passing credit card processing fees on to your customers, taking the pros and cons of doing so into consideration can help inform your decision.

What are the benefits?

There are two primary benefits of credit card surcharging:

Lower costs

The main benefit is, of course, that your business doesn’t absorb the processing fee on each sale in which the customer pays with a credit card. Instead, you are able to pass it on to them. Over the course of a week, month, and year, such costs really can add up to represent a sizable cost saving.

Improves appeal of other, more convenient payment methods

A second benefit of surcharging is that you can offer customers other payment methods that don’t incur a processing fee. This provides your business with the opportunity to enhance the customer experience by helping them lower the final price to be paid.


And the drawbacks?

Before implementing surcharges, thinking very carefully about the possible drawbacks is of utmost importance.

Your sales could take a hit

Conventional business practice dictates that increased pricing generally leads to a downturn in sales. If merchants in your sector by and large include a credit card surcharge on sales, any impact of introducing surcharges for your own business is likely going to be net-positive. However, if competitor businesses absorb credit card processing fees themselves, introducing surcharges to your customers would reduce your competitiveness and risk harming your sales.

It can impact perception of your business

Customers may take a dim view of having to pay an extra fee to be able to pay with credit card.

It only works on credit cards

Surcharging is only possible for credit card transactions. Debit and prepaid card transactions cannot include a surcharge by law.

It can make accounting more complex

There are two reasons why adding surcharges can increase accounting complexity. One, surcharges typically don't appear on statements, meaning that you or your accountant would have to go through each card transaction to identify which contain a surcharge and which don’t. Second, credit card providers differ in the processing fees they levy, ranging anywhere from 1.3% to 3.5%.


Best practices for setting up credit card surcharges

After considering the pros and cons of introducing surcharges, it’s crucial to ensure that your business abides by all regional and national laws and regulations.

Best practices include the following...

Check your legal obligations

In the USA, certain states may operate different surcharge laws. Therefore, it’s essential to ensure that you are not breaking any state or federal laws. You can check this with a business accountant or tax specialist.

Register with credit card issuers

In order to surcharge, your business has to register with the card brands, such as Visa and Mastercard. Visa stipulate to do so at least 30 days before you wish to begin surcharging.

Clearly inform customers of surcharges

You must post signage at your store entrance and at the point of sale that credit card fees incur a surcharge and include the exact fees involved. On receipts, the surcharge must be included as a line item and include the fee.

Get the right equipment

Specialized point-of-sale equipment is needed to identify the type of credit card being used, and as a result, the specific surcharge to add to the transaction.

Understand surcharge limits

The surcharge cannot exceed the cost to process the payment or be greater than 4% of the transaction amount.


Should your business add surcharges?

Surcharging has become far more widespread. There are only two states in the USA that currently outlaw the practice: Connecticut and Massachusetts, as well as the territory of Puerto Rico. Moreover, since the pandemic, more merchants have implemented the practice due to more difficult economic conditions, which has been helped by a wider drive to support local businesses.

What it really comes down to though is your own business. After all, each merchant has unique circumstances. It’s a good rule of thumb to consider what your competitors are doing, the possible impact it might have on your own customers, and the cost saving you would receive by passing on the processing fees. For most businesses, levying credit card surcharges might lead to losing some custom, but the cost saving of not having to pay processing fees could more than offset such loss.