Can You Pass Merchant Fees to Customers?

Credit card processing fees are a pain for merchants. Merchant fees cost businesses more than $100 billion per year—and that’s just in the United States.

If you’re reading this right now, there’s a good chance you’re paying tens of thousands annually in merchant fees. Some of you are spending upwards of $250,000+ on merchant fees every year.

To combat these costs, many businesses try to pass merchant fees along to their customers. 

But is this legal? How can you do it? Should you charge merchant fees to your customers? Lots of you are caught in this predicament, with more questions than answers. 

Continue below to discover everything you need to know about passing merchant fees to customers, including an alternative option to save money on credit card processing without forcing your customers to pay more. 

4 Methods to Pass Credit Card Merchant Fees to Customers

Passing transaction fees to customers can be done in many ways. Some of the methods are direct, while others are not. 

For example, adding a surcharge to credit card payments to cover transactional fees is a direct method. But giving your customers an incentive to pay with cash is an indirect strategy. 

We’ll cover both of these examples, and more, in greater detail below. This will help you determine which method (if any) is right for your business. 

Credit Card Surcharges

When you implement a surcharging program, your customers pay a fee to offset your costs associated with credit card processing. This is the most direct way to pass credit card fees to customers—but it’s also the most controversial. 

For example, let’s say you’re paying 3.5% + $0.10 per credit card transaction. 

If the total ticket amount of a sale is $100, you’d charge the customer $103.60. The $3.60 surcharge is paid by the customer, and your business takes home $100 as opposed to $96.40.

While this may seem like a simple solution, credit card surcharging isn’t always so straightforward. There are various state and federal laws that businesses must abide by. You also must be transparent with your customers about your surcharging program and make sure you’re following all rules that have been implemented by the credit card networks. 

Adding Convenience Fees to Credit Card Transactions

A convenience fee allows businesses to add fees to some transactions but not others. The rules for when you can and can’t add a convenience fee will vary based on the card network, business type, and situation. 

For example, let’s say you want to buy tickets to a baseball game. You might be able to purchase them directly from the stadium’s box office without incurring any extra charges. But if you want to buy the tickets online before you get there (because it’s more convenient), there might be a $10 convenience fee added to each ticket. 

In most cases, you’re only allowed to charge convenience fees on alternative sales channels. Here’s another example. 

Let’s say you’re running a brick-and-mortar retail business. You wouldn’t be able to add a convenience fee for items purchased at the register. But if a customer wants to call and pay for something over the phone, you may be able to charge a convenience fee for that transaction. 

Convenience fees won’t offset all your credit card processing costs since they don’t apply to every transaction. 

Cash Discounts

Offering cash discounts is a common way to offset merchant fees in states and jurisdictions where surcharging is illegal. 

The concept is pretty straightforward. Instead of charging more for credit card transactions, you charge less for cash transactions. 

This is something that you’ll commonly see at gas stations, where the cash price of gas is roughly $0.05 lower than the credit card rate. 

Many cash discount programs also apply to debit cards. First of all, it’s illegal to add a surcharge to debit cards. But since debit card processing is often much less expensive than credit card processing, many merchants are happy to have their customers pay with a debit card over a credit card. 

Minimum Purchase Requirements

With this method, merchants set a minimum amount to accept a credit card. Anything below the minimum amount would have to be paid in cash. 

This is a common practice for smaller businesses with a lower volume of credit card transactions. That’s because these businesses often have higher processing costs and lower ticket amounts.

Let’s say you’re paying a minimum $0.45 interchange fee to your processor for all transactions. This may not seem like much, but it can have a huge impact on businesses selling low-priced items. With a convenience store, you might sell a can of soda for $1. If a customer just wants one can, and If you’re paying a minimum of $0.45 for all credit card transactions, then nearly half of the sale will go to interchange fees. 

You’ll often see signs at businesses like this saying that the minimum purchase amount to use a credit card is $10. This amount is not arbitrary. It’s part of a 2010 ruling established with the Dodd Frank Act. 

Businesses are allowed to set minimum purchase requirements of up to $10 for credit card purchases, as long as it applies to all types of credit cards that the merchant accepts. 

For example, a business could not set a minimum purchase amount for $10 Amex cards but no minimum on Mastercard. These rules also apply to issuers, so merchants can’t favor certain cards over others. 

What’s the Difference Between Surcharges and Convenience Fees?

Surcharges are automatically applied to all credit card transactions. They’re pre-programmed on POS systems and terminals to adjust the final transaction amount appropriately based on the fee being paid. 

Convenience fees must be manually added to qualifying transactions. They can only be applied to alternative payments.

Surcharges are a percentage based on the interchange fee being paid for the transaction. Convenience fees are flat fees—not percentages. 

Is It Legal to Pass Credit Card Fees to Customers?

Surcharges and convenience fees on credit card transactions are legal on a federal level. But they are not legal in every state. 

There is a 4% maximum surcharge allowed at the federal level, which must be followed in all states where credit card surcharging is allowed. 

Minimum purchase amounts of up to $10 are legal in all 50 states. 

Most states and card networks require businesses to clearly post proper signage with a disclosure statement explaining how surcharges or convenience fees will be applied to transactions. 

The exact rules and requirements for passing credit card fees to consumers vary by state. So it’s in your best interest to check with your state’s regulations before you implement any changes to the way you’re processing credit cards. Otherwise, your business could be liable for some hefty fines and penalties. 

Can You Apply Surcharges to Debit Cards?

No. It is illegal to apply surcharges to debit cards.

Businesses are only allowed to apply surcharges to credit card transactions, and only if surcharging is allowed in their state. Where allowed, the maximum surcharge amount is 4%, and the business must apply the same surcharge amount to all card brands.

Are Credit Card Surcharges Legal?

It’s legal to implement credit card surcharges unless it’s restricted by local laws. 

Surcharging is legal at the federal level, but credit card surcharge laws vary by state. 

It’s illegal to add credit card surcharges in Connecticut and Massachusetts. Other states have unique regulations regarding surcharges, including Florida, Maine, New York, Texas, Oklahoma, California, Colorado, and Kansas. 

For example, the maximum allowable surcharge in Colorado is 2% (compared to 4% at the federal level). 

Always check with your state-specific laws before you add a surcharge or any additional fee to customers when you accept credit card payments. 

Is a Credit Card Surcharge Taxable?

Yes, credit card surcharges are taxable—as long as the initial transaction is taxable. 

The surcharge fee is considered part of the gross sales amount and, therefore, subject to the same tax rules as the entire purchase.

Pros and Cons of Passing Merchant Fees to Customers

If you’re considering whether or not to pass your merchant fees over to your customers, you must weigh the advantages against the drawbacks. 

Pros

• Lower credit card processing costs
• Ability to accept credit and debit cards without cutting into profits
• Giving customers more options to pay
• Help keep prices low for customers

Cons

• Customers may be unhappy about additional charges
• Fees paid by customers won’t cover all of your total processing costs
• Passing merchant fees to customers is not legal everywhere
• Each card network has different rules related to how you can add merchant fees
• The penalties for non-compliance can be harsh
• It can be tough to navigate the waters of how to properly set up a surcharging or cash discount programs

Surcharging, convenience fees, minimum purchase amounts, and cash discounts might be right for some businesses. Other businesses may find that the cons actually outweigh the pros. 

Best Practices For Passing Merchant Fees to Customers

If you want to pass processing fees to your customers, make sure you do it the right way. Here are some best practices that we recommend you follow:

Follow Laws and Requirements

First, you need to make sure that whatever type of fee program you’re implementing is legal in your state. There are laws in place at the state and federal levels to protect consumers from paying extra fees. But there are also laws in place to help protect you as a merchant from overpaying in situations that are avoidable. 

Be Transparent

Nobody likes being surprised by fees, and the last thing you want to do is upset your customers. Make sure you have signage clearly posted that explains the extra charges. You can even add a reason why, as it might help justify the added cost for your customers. Honesty can go a long way, but failing to do so can really hurt your business.

Provide Multiple Payment Options

Offering a wide range of payment acceptance options will make life easier for your customers. This gives them the option to choose whether or not they want to incur a cost based on convenience. Many customers might opt to pay with cash, helping both of you avoid fees. Others might decide to pay with a debit card, which could help keep your processing costs low. But the idea here is that the customer always has the option to choose what they want, and they may ultimately choose to avoid paying a credit card processing fee. 

Alternative Ways to Save Money on Credit Card Processing Fees

Passing merchant fees to your customers isn’t the only way to save money on credit card processing. Instead of passing this burden to your customers, you could save even more money by reducing your credit card processing rates.

Most businesses don’t realize this, but credit card processing rates are actually negotiable. 

There’s nothing you can do about the interchange rates imposed by the card networks—everyone has to pay those. But all of the processor markups associated with each transaction are completely up for grabs. 

Some of you might be paying processors an additional 1% or more over interchange for every transaction. That extra 1% could be costing you hundreds of thousands per year. 

Rather than switching providers or shopping around for a new payment acceptance solution, you can reach out to our team here at Merchant Cost Consulting. 

Our team will audit and analyze your most recent processing statements to identify where costs can be cut. In addition to the transaction fees, we’ll also look for extra and unnecessary fees that your processor is adding to your statements each month. This will help you save even more money than you would by adding a surcharge, as your surcharging program would only apply to transactional fees. 

Final Thoughts About Passing on Credit Card Fees to Customers

Credit card processing fees can add up quickly. To help offset these costs, you might consider passing fees to your customers in the form of a surcharge or convenience fee. Alternatively, you might offer cash discounts or apply a minimum transaction amount to use credit cards. 

While these types of strategies can help, they’re not always effective. They’re not legal everywhere, they can upset your customers, and they don’t address the overall costs associated with your total credit card processing.

Instead, you can save more money by negotiating your processing costs, and you can do so without switching processors. Get your free audit today from our team here at Merchant Cost Consulting. We’ll tell you how much money you can save on credit card processing, and we’ll even negotiate your rates directly with your processor on your behalf.