Credit Card Processing Fees: What Are Your Options?

For many years, credit card agreements forbade merchants from passing along the cost of accepting credit cards. With airline miles, cash back, and other incentives for consumers to use credit cards, merchants are experiencing ever increasing fees as more and more consumers use cards for even their smallest purchases. Not surprisingly, that led to litigation several years ago. Resolution of that litigation resulted in two new terms and options for merchants in most states.

Let’s start with the “most states” comment. Ten states (CA, CO, CT, FL, KS, ME, NY, OK, TX and Puerto Rico [yes, we know that is not a state]) have laws that make surcharges illegal. Those laws are currently under attack as being unconstitutional, so they may disappear in the not too distant future. Except for those states, and recognizing that we are discussing credit cards, not debit cards, the rest of this article gives you some idea of what you may consider as a merchant.

Two definitions are key: (1) Surcharge (or checkout fee) is an additional fee charged at the time of checkout for use of credit cards as opposed to some other form of payment; (2) Convenience Fee is a fee charged for the “privilege” of paying for a product or service using an “alternative payment channel” or method that is not standard for that merchant. An example of a convenience fee is a business which generally handles only cash or checks, but as an accommodation creates a portal for credit card transactions and incurs an added expense by doing so.

For Surcharges: The first thing you will need to have handy is your merchant agreement with the various credit card companies. Those agreements contain provisions which set out how a surcharge may be assessed. Generally, these are flat fees, not percentages of the purchase. A fairly common thread is that you will need to notify the credit card company (Visa, MasterCard, AmEx, Discover, …) a minimum of 30-days in advance of the fee taking effect. You may only collect surcharges on credit cards, not debit or prepaid cards. You must disclose the fee as a “merchant fee” and must post notice (online or in the store) and on the receipt which is generated.

For Convenience Fees: The rules are essentially the same. They are just not governed by the credit card companies since this is not about using the credit card, but rather is about the use of an alternative payment method not usual to the merchant’s business model. The key here is that consumers may react poorly to the assessment of a convenience fee. The prime example occurred back in 2011 when these fees were first permitted. Verizon announced a $2.00 per transaction charge for customers using credit cards. There was a massive volume of complaints which resulted in Verizon rescinding its fee. Then there is the question as to when an “alternative payment method” ceases to be alternative? There is no answer to that question, yet.

The bottom line is that accepting payment by credit card comes at a cost for merchants, but it also provides convenience for customers and greater assurance of payment for the merchant. Therefore, there are many elements to be balanced in making a decision on surcharges. Just remember to take the necessary steps if you decide to go that route.

By: Nan E. Hannah