The Truth About Surcharging

Vicki T

January 10, 2020

Sam Levitt

Glenbrook’s Cici Northup and Sam Levitt co-authored this Payments Views post.

You have likely observed an increase in the number of articles about surcharging. These articles show that the practice is on the rise and often tout significant benefits for merchants:

“Fortunately for businesses operating in the U.S., surcharging is becoming more widely accepted”

“Credit card surcharges grow more common”

“Merchants have embraced surcharging as a means to push back against the rising cost of credit card acceptance”

Because the conversation around surcharging has picked up in the past few years, especially regarding small businesses, we wanted to take a closer look at what surcharging is and if it really does benefit merchants. 

What is surcharging?

Surcharging is when a merchant accepts cards, but charges customers an additional fee for the use of credit cards. Generally, this practice takes place at the point of sale (POS).

Merchants may opt to add additional fees to credit card purchases for one simple reason: to recoup a portion (or all) of the fees associated with accepting credit cards.

While it may seem straightforward and an obvious to way to reduce costs and increase margins, surcharging may not always provide a benefit to the merchant.

A merchant can actually lose money as a result of surcharging

We conducted an in-depth analysis of the impact of surcharging on a merchant’s payment acceptance margins. Our research, which was focused on small businesses, indicates that surcharging is a high-risk practice because it may impact a customer’s willingness to make a purchase at all. Our analysis shows that a merchant may lose money if as little as 3% of existing credit card customers choose to not make the purchase as a result of the surcharge.

(Assumes the merchant pays a 3.5% bundled merchant discount rate to its payment provider and the merchant surcharges credit card transactions at 3.5%. The simulation was run on 1,000 total SMBs (less than $2 million in annual transaction volume) of various sizes and average transaction values.)

Will customers actually walk away? While customer behavior around surcharges has not been studied in depth in the U.S., this behavior was studied via a survey conducted by the Australian Commonwealth Consumer Affairs Advisory Council (CCAAC) in 2013.  The survey found that if a surcharge is applied, 24% of Australians would cancel the purchase and find another merchant if they did not have a fee-free alternative payment method available. That figure is 8 times larger than our estimated threshold (3%) at which a merchant can actually lose money as a result of a surcharge. Of course, many of those customers would simply use an alternative fee-free payment method, but likely not all of them.

Additionally, this analysis fails to consider the loss of customer goodwill or loss of future business (i.e. a customer pays the surcharge once but does not return) that may result from a surcharge. This impact is amplified when the merchant operates in a competitive market where the competition does not add a surcharge. 

Surcharge compliance with card scheme rules can be difficult

Assuming a merchant wants to accept Visa, Mastercard, and American Express, it has to be compliant with each card scheme’s rules. Our research shows that this may be impossible since the card scheme rules contradict one another. Visa and Mastercard are mostly aligned: both do not allow merchants to surcharge debit card transactions. However, American Express requires a merchant to surcharge all cards in the same fashion (remember, Amex doesn’t issue debit cards). As a result, a merchant cannot accept Visa, Mastercard, and American Express, apply a credit card surcharge, and be compliant with all three card scheme rules.

While not common, issuers reserve the right to file compliance complaints against a merchant for improper surcharging practices. Additionally, consumers can file surcharge-related complaints directly with card network, and the card networks occasionally conduct secret shopper spot checks for non-compliant behavior. A merchant can be fined if it is caught breaking card scheme rules.

More detail on scheme rules: 

Visa and Mastercard surcharging rules in the U.S. are largely the same and require the following:

  • Surcharging is only allowed on credit cards.
  • Surcharging can be conducted at the brand level (i.e. all credit cards are surcharged the same amount) or product level (i.e. credit cards are surcharged based on the particular credit card product).
  • A merchant must notify each card network 30 days in advance that it intends to surcharge.
  • Surcharge fees cannot exceed the lesser of either the merchant’s cost of acceptance or the limit set by the network (4%).
  • Surcharge fees must be clearly displayed and explained to the customer at the point of purchase.
  • Visa and Mastercard require the merchant to handle both brands in a similar fashion, although some exceptions exist.
  • Mastercard requires that the surcharge amount be itemized on the receipt and requires the surcharge amounts to be included in authorization and clearing messages. Visa reportedly requires this as well, though it is not as clearly stated in the scheme rules.

American Express surcharging rules in the U.S. require the following:

  • Merchants may surcharge as long as the surcharge is imposed equally on all “other payment products,” except for electronic funds transfer, cash, or check. (“Other payment products” are defined as any “charge, credit, debit, stored value, prepaid, or smart cards”).


What’s the deal with cash discounting? 

While our analysis is mostly focused on surcharging, cash discounting is another practice that merchants use to reduce the cost of payments acceptance. The practice refers to offering a discounted price for a good or service if the customer uses a payment method that is not a credit card, typically cash or debit cards. Cash discounting is often seen at gas stations that have distinct prices for cash and debit transactions.

While the card schemes do not have explicit rules around cash discounting (a merchant is free to offer discounts for cash since it exists outside of the purview of the card schemes), we’ve noticed more and more merchants offering cash discounts that are really noncompliant surcharges “in disguise”. In essence, these merchants are raising the prices across all of their goods / services but are offering a discount if the customer pays with cash. Effectively, these merchants have levied a surcharge on both credit and debit cards and called it a cash discount. This is against Visa and Mastercard rules.

Visa has tried to affirm its rules by issuing a bulletin in October 2018 that reads:

“Models that encourage merchants to add a fee on top of the normal price of the items being purchased, then give an immediate discount of that fee at the register if the customer pays with cash or debit card, are NOT compliant with the Visa Rules and may subject the acquirer to non-compliance action.”

Legality of surcharging across the U.S. is in flux

A landmark class action federal level lawsuit against Visa and Mastercard in 2013 opened the door for surcharging. However, the practice was still banned in 10 states that had existing regulation prior to the lawsuit. Of these 10 states, Florida, California, Texas, and New York have passed legislation in recent years deeming these surcharge bans unconstitutional and a violation of a merchant’s free speech. However, surcharging is still banned in six states including, Colorado, Connecticut, Kansas, Maine, Massachusetts, and Oklahoma. As a result, state by state regulations are in flux. If a merchant operates in one or more of these states (while not common for small businesses), it must monitor state level regulations to ensure compliance.

Should a merchant surcharge?

So, should a merchant surcharge? Perhaps. It depends on multiple factors. Every business is unique based on who it serves, how its customers want to pay, the mix of payment methods preferred by the merchant, and what it sells. Competition is a huge factor. If competitors don’t surcharge, it’s hard for the merchant to add those extra fees for using a credit card. It’s important to consider all of the implications of surcharging before diving in. Just keep in mind the lesson from the e-commerce world. Anything that adds friction to the purchase process is a Bad Thing.

Do you have thoughts on the subject? Please comment below!

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