Every expense of your business operations reduces your overall profitability. With the economic downturn caused by the COVID-19 pandemic you are likely looking for areas that you can save money or offset expenses by passing them on to your customers.
You know, there is an expense in accepting credit cards. The pandemic has caused an increase in the use of credit cards through increased online sales. As we move forward towards a cashless society, merchants are forced to accept more credit card transactions and that increases your operating costs. Implementing a convenience fee or surcharge can help you harness this cost of operations. We will explain the differences below as well as the important information you need to know.
What Is A Convenience Fee?
A convenience fee is a fixed amount added to the purchase price. The customer pays this fee in exchange for being able to use a payment method that is convenient to them. An important thing to remember when adding this fee is that your customer must have the option of paying by cash or check to avoid this fee. An example of a convenience fee you may have experienced is when you purchase movie or concert tickets online and pay a convenience fee. You are not forced to purchase tickets online. You choose to purchase online as opposed to paying cash at the box office when you arrive. As another example, some landlords may allow tenants to pay rent using an online portal. The tenant could go to the rental office and drop off a check, but since it is more convenient to pay online, a convenience fee can be tacked on for the convenience offered. There are very specific rules that vary by card issuer on how a convenience fee is assessed. While Visa has the most thorough policy, Discover and American Express are both rather vague about convenience fees. We will explain more about these rules below and show you how to properly charge a convenience fee.
What is a Surcharge?
Adding a credit card surcharge is another way to offset fees you pay for accepting credit card transactions. A surcharge is not at the same as a convenience fee and there is a lot of confusion about the two. Surcharging is the practice of adding on a small fee to a transaction to cover a merchant’s costs for credit card transactions. It is another way of asking your customer to pay for the convenience of being able to use their card but in a different way. A surcharge is added to a product or service’s regular price when a customer pays with a credit card. It can be applied to the total of all items purchased or to specific items that have a low profit margin. It is the merchant’s decision on what to surcharge. The rules related to credit card surcharges are complex, so if you have any concerns you should discuss them with your dedicated Chosen Payments account manager. You may have heard that surcharging is illegal. In some states, it still is illegal. However, following a massive class-action lawsuit filed against Visa and Mastercard, the two popular card brands settled and as part of the settlement laid the groundwork for merchants to recoup some costs associated with accepting credit cards for payment by adding on a small fee to cover the cost of the transaction.
Despite the lawsuit and new rules caused by the settlement, state laws and card brand rules still govern the practice of surcharging. Those rules include governing how you add surcharges, and the limits on which cards you can apply surcharges to and how much you can charge.
Before we share the rules imposed by Visa and Mastercard, if you live in Colorado, Connecticut, Kansas, Massachusetts or Oklahoma, surcharging is still considered illegal. The states of California, Florida and Texas have declared surcharges unconstitutional but their ruling was limited in scope and rather than implementing surcharges, those state suggest that merchants offer a cash discount to those customers paying by cash or check. In this method, you are providing an incentive for your customers to pay cash as opposed to penalizing those who pay by credit card.
Another important thing to note is that you absolutely cannot impose a surcharge on debit or prepaid cards. Surcharges can only be applied to credit cards. Even if you process a debit transaction as a credit card transaction on your POS, it is still a debit and exempt from surcharging. The states of Maine and New York require additional disclosures to your customers. In both states, you must post both the cost of paying with cash and the cost of paying with a card, using dollars and cents. This is on top of the requirements of Visa, Mastercard, American Express, and Discover, which require you to post notifications at the point of sale and specify the amount of any surcharge.
How Much Surcharge is Allowed?
The maximum is 4% of the total transaction amount. However, when setting your surcharge, you should use your actual effective rate for determining the percentage you charge. A surcharge is not intended to become a profit center. The effective rate you implement can be based on either the previous 12 months or the month prior. Your effective rate for Visa and Mastercard transactions is likely in the range of 2.5-3% depending on your volume and the type of cards you accept such as corporate, rewards, no rewards etc. Thus, charging 4% would not be ethical. However, since American Express charges a higher percentage of your sales than Mastercard and Visa, you can implement a rate higher than 3% but not more than your actual highest processing cost. You cannot charge a higher surcharge for American Express transactions even though it costs you more to process because Section 3.2 of American Express’s merchant guide, “treatment of the American Express brand,” says that merchants cannot “impose any restrictions, conditions, disadvantages, or fees when the Card is accepted that are not imposed equally on all Other Payment Products, except for electronic funds transfer, or cash and check,” among other rules.
Giving Surcharge Notice to Your Customers
If you plan to add a surcharge, you must post a notice at the entry to your business letting customers know that you add a surcharge to credit card transactions. You must also post a notice at your point of sale. The notice must include the rate you charge – as well as a comment that it does not exceed your actual processing fees. Here is a link to sample signage and verbiage you can use: sample signage. The requirements for surcharging online transactions are very similar and you must include the disclosure in the checkout process and the surcharge must be also be included on the receipt. If you implement surcharges, you are required to include the surcharge as a specific line item, as well as reporting collecting it to your credit card processor and ultimately the card brands.
How to Notify Chosen Payments
If you decide to implement surcharging, you should discuss it with your Chosen Payments Account Manager. You must provide us with written notice in addition to the discussion with your Account Manager.
Even if your state allows surcharging, it is not a decision to be taken lightly as it could have an adverse effect on your business depending on who your customers are, what industry you are in and whether your competitors charge it. Implementing a surcharge could potentially cost you customers. If you sell the same items that Target or Walmart are selling online, a customer will likely opt to purchase from the big box store or even Amazon because they do not implement surcharges. One reason you don’t see surcharges in major grocery stores is because no one wants to be the first to implement it in an industry that is fiercely competitive with very thin profit margins.
Implementing Convenience Fees
Convenience fees are also regulated be the credit card brands and each brand has their own rules. You can view them below by card brand:
According to Visa’s website:
A merchant is permitted to charge a convenience fee to the customer. The fee must be a flat fee (not a percentage of the transaction amount), clearly disclosed, and represent payment for the convenience of paying by credit card as opposed to cash or check.
Here are some major rules for implementing a convenience fee for Visa transactions:
- Can only be charged online.
- Cannot be charged if you are solely an online merchant (if you are, then consider a surcharge).
- Must disclose clearly and give the cardholder a chance to cancel the payment before paying.
- Fee must be included in the total amount of the transaction and not charged separately.
- Applicable to all forms of payment accepted in the payment channel.
- Fee must be a flat or fixed amount, regardless of the value of the payment due.
- Cannot charge for recurring transactions or installment transactions.
- Cannot charge both a convenience fee and a surcharge.
Mastercard’s rules for convenience fees are a little vague. It seems that Mastercard does allow convenience fees, but only for government and education entities. Specifically, convenience fees are allowed only in connection with these types of payments:
- Tuition and school-sponsored room and board for elementary schools, secondary schools, colleges, universities, and professional schools.
- Government and court fees, costs, and fines, including alimony and child support payments.
- Local, state, and federal taxes.
There are some additional rules under the Mastercard Convenience Fee Program. They include:
- If you charge a convenience fee for American Express, Discover, and Visa, then you must treat Mastercard in the same way you treat these other cards.
- There are additional electronic data security standards that you may have to adhere to.
- The cardholder must be notified of the additional convenience fee and be given a chance to back out of paying this way.
Finally, Mastercard recommends that the convenience fee be charged separately from the actual payment. This is exactly the opposite of the Visa requirement. Fortunately, this is NOT a mandatory rule.
American Express does not have a clear policy on convenience fees. It does not prohibit merchants from charging them. You can charge a convenience fee as long as –
- The fee fits the definition of convenience fee (as opposed to a surcharge),
- You do not discriminate against the use of the American Express card
- You disclose the fee to the cardholder and give the cardholder a chance to back out.
As long as you meet Visa’s requirements, you should also satisfy American Express’s.
Like American Express, Discover does not have a rule on convenience fees. Because there are no clear, stated rules on convenience fees, the only other consideration is Section 2.4 of Discover’s Merchant Operating Regulations R11.1. This rule requires the merchant to not discriminate against the use of the Discover card, similar to American Express’s policy.
Giving Convenience Fee Notice to Your Customers
Since Visa has the most detailed requirements for convenience fees, following Visa’s rules should satisfy the rules imposed by other card brands. There is no strict wording requirement for the notice itself. We suggest the following wording for online transactions:
CONVENIENCE FEE NOTICE: This method of paying online is provided to you for your convenience. If you proceed to check-out, you will be charged a convenience fee of [INSERT AMOUNT]. This fee is added to the total charge for the goods/service you purchased today. If you do not wish to pay this fee, please click “cancel” below to return to the previous page. You may pay us by [CHECK, ACH, IN PERSON] without incurring a convenience fee.