What Merchants Should Consider Before They Surcharge

Some companies in the credit card industry have been accused of overcharging merchants or issuing unauthorized fees, which some say is possible due to a lack of regulation.

If you think about it, when major credit card processors went public, they, like most publicly traded companies, were under pressure to deliver larger profits. But, as the managing partner of a company that audits credit card processing fees, I believe the difference is that other companies are usually regulated and reside in a space where the free market keeps them in check. If a business charges too much, you just buy the product from a different one. However, with credit card processing fees, businesses have very few, if any, options in the merchant processing world.

In my experience, many point of sale systems, enterprise resource planning systems, etc. have exclusive deals with specific credit card processors, which leaves the business with only one option: the processor to which they gave exclusive rights. Senator Richard Durbin’s Credit Card Competition Act of 2023 is designed to help open up this closed system to some degree, but to date, nothing has changed.

As merchants navigate increasing credit card fees, more and more businesses are exploring surcharging or are surcharging already. They are just trying to offset credit card processing fees. I’ve had many businesses tell my company that they feel they are between a rock and a hard place: pay the higher fees or take a risk trying to surcharge. But there are other options.

1. Consequences Of  Violating Surcharging Rules

While it is uncommon in my experience that this happens, a merchant can become blacklisted by credit card processing networks if it violates any of the processors’ rules, including those regarding surcharging. While rare, if a business receives a warning and continues to break the rules, its ability to process credit card payments can be permanently revoked. For most businesses, this alone could be catastrophic.

2. Not Understanding Who May Be Held Liable For Mistakes

Merchants need to read their processing agreements. They may find an indemnity clause that says they cannot be held accountable for anything. The potential issue with this is that if the indemnity clause says the processor can’t be held accountable for anything and that processor sets up the merchant’s surcharging program, the merchant could be held liable if there’s a problem.

3. Confusion About Rules And Laws

Visa surcharge rules don’t perfectly align with Mastercard’s surcharging rules, and both differ from American Express’ surcharging rules. In some instances, they’re in opposition. For example, Visa caps surcharging at 3%, while Mastercard sets the limit at 4%. Additionally, both Visa and Mastercard prohibit surcharges on debit cards. However, American Express requires that all card types, including debit cards, be treated equally. This means “merchants wishing to charge a surcharge would be considered non-compliant (from an Amex rules perspective) in certain scenarios,” according to Worldpay.

Now, let’s layer in the risk of violating the laws of the states that either have laws that ban surcharging or that don’t ban surcharges but have rules that may be difficult to comply with if merchants aren’t familiar with them. Some merchants may look at a chart showing that their state doesn’t outright ban surcharging and mistakenly believe they are OK because their location is not on the list. But does their state have stringent rules? Colorado, for example, set the maximum surcharge limit at 2% of the cost of the transaction, even if the business must pay the processor 3%. Or, what if someone from Connecticut buys something from a company in Missouri? Missouri does not ban surcharging, but Connecticut does. Make sure you familiarize yourself with your state’s surcharging laws. You can also consider working with an expert who can validate your process to help ensure you don’t run into issues.

What Businesses Can Do

In my view, surcharging does not have to be the answer. The answer is for companies to see if their credit processing fees can be lowered. Don’t simply charge your customers 3%; this could hurt your business. Just because someone follows through and makes the sale doesn’t mean they won’t be looking elsewhere next time they need what you are selling. An easy way to comprehend this is to ask yourself, “How do you feel and act when this is done to you?”

To lower your fees, consider working with a firm that can give you a free audit to see whether your processor is overbilling you and how much money you might save if you were to lower your fees going forward. (Disclosure: My company helps with this, as do others.) If hiring a firm, make sure to check out their experience. LinkedIn is a great tool for looking at key people’s past work experience. Does the team have experience and a background in working with large credit card processors? Do they require a contract? That can be risky because if they do not deliver, you may not be able to go to another firm for the contract’s specified number of years. Do they use their own auditing software, or will they source your private financial data to a third party to do the audits for them? And, of course, get everything written on their company letterhead and signed by an officer. Emails and phone calls won’t hold up if you find yourself in court.

It’s also important to ensure you have someone on your staff who looks at and compares your fees every month to track whether your fees go up or if a new fee is added. If they do see a change, ask your credit card processor to show you the exact change that you see on your statement on the credit card servicer’s website. In other words, take control.