What is Card Surcharging?

What Surcharging Is

When a merchant accepts a credit card, the card networks and issuing banks charge interchange and assessment fees that the merchant's payment processor passes through, often with markup. These costs typically range from 1.5% to 3.5% of the transaction. Surcharging is the practice of passing those costs (or a portion of them) directly to the customer who chose to pay with the credit card, instead of absorbing them into the merchant's prices.

Surcharging is different from a cash discount, which lowers the price for cash payers instead of raising it for card payers. It's also different from a convenience fee, which applies when a payment channel is non-standard (like online for an in-person business).

The History

For decades, Visa and Mastercard's network rules prohibited US merchants from surcharging on credit card transactions. Merchants could offer cash discounts but couldn't add a fee for card use. This created the long-standing dynamic where everyone paid card-friendly prices regardless of how they actually paid.

The 2013 settlement of In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation changed that. As part of the settlement, Visa and Mastercard agreed to allow merchants in the US to surcharge on credit cards, subject to detailed rules.

Separately, the Durbin Amendment to the 2010 Dodd-Frank Act capped debit card interchange for large banks and prohibited the networks from blocking debit surcharging. However, federal law and network rules now generally prohibit surcharging on debit cards regardless of how the customer routes the transaction.

Network Rules

Visa and Mastercard's surcharging rules largely mirror each other. The key requirements:

• Cap: Visa caps credit card surcharges at 3% as of April 2023 (down from 4%). Mastercard similarly caps surcharges. The surcharge can never exceed the merchant's actual cost of acceptance for that card type.
• Notification to networks: The merchant must notify Visa and Mastercard at least 30 days before beginning to surcharge by submitting a written notification through their acquirer.
• Disclosure to customers: The merchant must clearly disclose the surcharge before the transaction completes. Disclosure is required at the point of entry, at the point of sale, on the receipt, and on the merchant's website if applicable.
• Brand-level vs product-level: Merchants can choose to surcharge all Visa or Mastercard credit cards uniformly (brand level), or surcharge only specific card products (product level). Mixing the two requires care.
• Debit prohibition: Surcharging on debit cards (including signature debit and PIN debit) is not permitted. The fee can only apply to credit transactions.
• Receipt detail: The surcharge must appear as a separate line item on the receipt, with the amount clearly identified.

State Rules

State law varies significantly. Several states historically banned credit card surcharges by statute, but court challenges and legislative changes have shifted the picture:

• Connecticut: Bans credit card surcharges by statute. Cash discounts are allowed.
• Massachusetts: Banned surcharges historically; the ban was lifted in 2023.
• Maine: Bans surcharges.
• New York: Allows surcharging since 2023, with disclosure requirements that include showing the highest price on display tags.
• California, Florida, New York, Texas, and others: Have had laws challenged, struck down, modified, or replaced over the past decade.

The picture changes regularly. Before launching surcharging, merchants need to confirm current law in every state they operate in.

How Surcharging Works in Practice

A merchant adopting surcharging typically goes through these steps:

• Confirm state law allows surcharging in every operating state
• Notify Visa, Mastercard, Discover, and American Express through the acquirer at least 30 days before launch
• Update point-of-sale systems, payment pages, and receipts to disclose the surcharge
• Update signage at the point of entry and the point of sale
• Configure the payment platform to apply surcharges only to credit transactions, not debit
• Train staff to handle customer questions and disputes

Convenience Fees vs Surcharges

A convenience fee is a flat fee for using an alternative or unusual payment channel for a class of transaction. The classic example: a utility that bills monthly by mail allows customers to pay online for a $5 fee. Convenience fees have separate (and often more permissive) rules under the card network policies, but they can't apply to standard channels.

The two get confused often. The IRS, for example, allows tax payments by credit card with a fee that's typically called a convenience fee but functions more like a surcharge. This works because the IRS uses contracted third-party processors and disclosed fee structures.

Customer Reaction

Customer reaction to surcharging is mixed and varies by industry. In B2B settings, surcharges are widely accepted as a standard cost-pass-through. In retail and hospitality, surcharges can drive customer pushback, complaints, and lost sales. Many merchants choose to absorb the cost rather than introduce friction at the payment moment, especially in competitive segments.