A merchant's main concern in business is bringing in as much revenue as possible. That's why many look to fees charged by card companies with a wary eye. Their concern will likely become greater when Visa and Mastercard raise transaction processing fees in April.
A solution many merchants have turned to is passing that cost on to their consumers. Now that more states than ever allow the practice, surcharging may seem on the surface like the money-saving answer businesses are looking for. But is it legal to charge a credit card processing fee?
Unfortunately, the rules behind making and taking credit card payments are more complex than just tacking on a fee for every card transaction your business processes. The way in which you and other merchants can close the gap on costs depends on your understanding of fee definitions and distinctions.
Legal Definitions vs. Card Brand Designations
One of the reasons there is so much confusion around surcharging is because there isn’t one clear-cut definition of the practice. Many state legal definitions of a surcharge don’t directly align with Visa or other card brand definitions.
Legal Surcharge Definitions
The most important fact to note about surcharging is that there are still a handful of states in which it is not legal. What’s more, the way it can legally be enacted may vary according to individual state statutes. Sometimes these state laws align more with the Visa regulations for a convenience fee than a Visa surcharge.
It is important for merchants to discuss this topic in-depth with their company’s attorneys. Ensure the way you plan to implement your fee or discount program is legal according to every state in which you do business.
VISA Card Brand Definitions/Distinctions
Again, the legal definition of a surcharge can vary from the fee definition Visa provides in their rule book. The three types of fees merchants are allowed to charge (according to Visa, the most stringent of all card brands) are convenience fees, surcharges and service fees.
The most important factor of charging a credit card convenience fee is that it must actually represent a convenience to the consumer. According to Visa it must be “charged for a bona fide convenience in the form of an alternative payment channel outside the merchant’s customary payment channels and not charged solely for the acceptance of a card.”
A few of the other distinctions of a convenience fee are:
- It must be added only to a transaction completed in a card-absent environment
- A convenience fee can't be charged in an exclusively card not present environment
- Can only be charged by the merchant that provides goods or services to the consumer
- Must be clearly disclosed to the cardholder:
- As a charge for the alternative payment channel convenience
- Before the completion of the transaction. The cardholder must be given the opportunity to cancel
- Must be a flat or fixed amount rather than a percentage, and has to be included in the total transaction amount, not as a separate fee.
Surcharging is allowed by Visa, but merchants who plan to surcharge the use of Visa cards must notify the credit card company 30 days before doing so. Here are the other main points outlined by Visa:
- The fee can only come from the merchant providing the service. The additional fee at checkout for using a credit card must be a percent, not a flat rate.
- Surcharges are not allowed on debit cards at all. A merchant’s payment provider must be able to distinguish between credit and debit transaction while processing a payment.
- The surcharge can’t exceed four percent.
In the United States, there are only a few acceptable types of transactions where a service fee may be charged. A service fee must be charged by “a government agency or education merchant, or its third party.”
The entity that charges the fee must be:
- Registered with Visa
- Assigned a unique Merchant Verification Value
Offer a Discount for Cash Transactions?
The cash discount is another money-saving tactic that businesses have recently turned to. Though it’s acceptable to offer a discount to those who pay with cash according to Visa, the card brand weighed in on the practice earlier this year to clarify their rules. Specifically, merchants can’t add additional fees in order to lower them later for cash transactions. Read all rules associated with cash discounting before implementing this type of program.
Consequences of Noncompliance
Merchants who don’t adhere to state surcharging statutes are subject to legal discipline. This in itself should be cause for caution, but there’s more that can be lost if your business enacts fees or discount programs recklessly.
Merchants who fail to follow Visa regulations are eligible to lose the privilege to accept Visa cards through their merchant account. Being unable to process the most popular card brand will drastically reduce the transactions you process immediately, and cause continued loss as potential customers abandon payments due to inconvenience.
Keep your company going strong by staying informed of all the facts associated with credit card processing fees. Speak to your attorneys and stay up-to-date with credit card payment news.
In the meantime, for some pointers on charging credit card convenience fees, download our Credit Card Convenience Fee Guide.