Can you legally charge customers credit card fees or processing fees?

Credit card fees or processing fees: what CAN you charge?

Small business owners and entrepreneurs often do things illegally without knowing. And with constantly changing laws, it can be hard to keep up. A common practice is for businesses to pass along the fees incurred from their credit card processing, and slap a fancy name on it, but this is actually highly regulated and nuanced, so if you take money from people, you should know how to do it without getting yourself or your company in trouble.

CardFellow.com has carefully laid out the rules, but first an update: As of January 2013, Merchants are permitted to charge customers a surcharge for paying with a credit card, but ten states still prohibit surcharging, and surcharges are still not allowed on signature and pin debit transactions (read more on this).

Regarding what CardFellow alls the “maze of rules, exceptions and even state laws,” there are proper ways “to navigate to ensure you stay compliant with the terms of your merchant processing agreement.”

They note that the act of charging customers a fee to pay with their credit card is commonly referred to as checkout fees, convenience fees, or surcharging and each of the four major card brands has a slightly different policy concerning the topic. Below, in their own words (originally appearing on the CardFellow blog), they outline the general guidelines regarding convenience fees first, then what it all means, and ultimately if and how your business can pass processing fees to your customers.

The rules regarding Visa

As I’ll cover a little later, there are a few exceptions to Visa’s convenience fee guidelines, but the bulk of their policy is outlined on page 477 of their April 2011 Visa International Operating Regulations. Visa’s current published policy is as follows:

In the U.S. Region, except as specified otherwise for Tax Payment Transactions in “Tax Payment Program Fee Requirements – U.S. Region,” a Merchant that charges a Convenience Fee must ensure that the fee is:

• Charged for a bona fide convenience in the form of an alternative payment channel outside the Merchant’s customary payment channels
• Disclosed to the Cardholder as a charge for the alternative payment channel convenience
• Added only to a non-face-to-face Transaction. The requirement for an alternate payment channel means that Mail/Telephone Order and Electronic Commerce Merchants whose payment channels are exclusively non-face-to-face may not impose a Convenience Fee.
• A flat or fixed amount, regardless of the value of the payment due
• Applicable to all forms of payment accepted in the alternative payment channel
• Disclosed before the completion of the Transaction and the Cardholder is given the opportunity to cancel
• Included as a part of the total amount of the Transaction

Convenience Fees Not Assessed by a Third Party – U.S. Region 5.2.E

In the U.S. Region, except as specified in “Tax Payment Program – Interchange Reimbursement Fee Qualifications and Fee Amount – U.S. Region,” a Convenience Fee may only be charged by the Merchant that actually provides goods or services to the Cardholder. A Convenience Fee may not be charged by any third party.

Convenience Fees on Recurring Transactions – U.S. Region 5.2.E

In the U.S. Region, except as permitted in “Tax Payment Program – Interchange Reimbursement Fee Qualifications and Fee Amount – U.S. Region,” a Convenience Fee must not be added to a Recurring Transaction.

The rules regarding MasterCard

I’ll cover MasterCard’s special regulations pertaining to convenience fees charged by educational and municipal merchants in a little bit. For now, the following is MasterCard’s convenience fee guidelines that pertain to most business taken from page 5-19 of their MasterCard Rules document.

A Merchant must not directly or indirectly require any Cardholder to pay a surcharge or any part of any Merchant discount or any contemporaneous finance charge in connection with a Transaction. A Merchant may provide a discount to its customers for cash payments. A Merchant is permitted to charge a fee (such as a bona fide commission, postage, expedited service or convenience fees, and the like) if the fee is imposed on all like transactions regardless of the form of payment used, or as the Corporation has expressly permitted in writing. For purposes of this Rule:

1. A surcharge is any fee charged in connection with a Transaction that is not charged if another payment method is used.
2. The Merchant discount fee is any fee a Merchant pays to an Acquirer so that the Acquirer will acquire the Transactions of the Merchant.

The rules regarding Discover

Discover rules regarding what they refer to as surcharging are less strict than Visa and MasterCard’s, but like Visa and MasterCard, Discover forbids convenience from being imposed on their cards if the same fees aren’t also applied to all other brands. Discover’s rules regarding surcharging can be found on page six of their Merchant Operating Regulations.

I’ve provided this document below because Discover does not publically post it on their Web site. The latest copy at the time of this writing is April 2011, going forward you will want to check with Discover to verify the latest information.

Discover rules for surcharging are as follows:

Section 2.5, Surcharges and Discounts
New terms permit you to offer discounts at the point-of-sale, as provided in the Dodd-Frank Act. You may offer differential discounts depending on the method of payment (e.g., credit, debit, cash or check), but such discounts may not differentiate based on issuer or payment network. If you operate in Canada, see Section 5.12 to identify differences that apply to discounts offered in Canada.

Equal Treatment of Cards with Other Payment Cards; Equal Treatment of Card Issuers Other than with respect to discounts as permitted in Section 2.5, you may not institute or adopt any practice, including any discount or in-kind incentive, that unfavorably discriminates against or provides unequal and unfavorable treatment of any Person who elects to pay using a Card versus any other credit card, debit card, prepaid card, or other payment card that you accept (except for any proprietary payment card issued by you or any payment card issued under a formal co-branding relationship between you and a card issuer), and you may not in any way discriminate among various Issuers of Cards, except to the extent such restrictions are prohibited by Requirements of Law or permitted as set forth in Section 5.12.

Surcharges and Discounts
You may assess a surcharge on a Card Sale provided that (a) the amount of the surcharge may not exceed the Merchant Fee payable by you to us for the Card Sale and (b) you assess surcharges on Card Sales conducted using other cards accepted by you, in each case subject to the restrictions in Section 2.4; and (c) you otherwise comply with Section 2.4. You may not assess a surcharge or other penalty fee of any kind other than as set forth above. Effective upon publication of Release 11.1 of these Operating Regulations, you may offer discounts or in-kind incentives for payment by different tender types (e.g., a discount for payment by cash versus payment by credit card) subject to the restrictions in Section 2.4.

The rules regarding American Express

American express has pretty vague restrictions on convenience fees, and they more or less defer to the guidelines set forth by the other three major card brands. American Express outlines their convenience fee guidelines in section 3.2 of theAmerican Express Merchant Regulations.

Like Discover, American Express doesn’t post the Merchant Regulations on their Web site. So, I’ve included it here so you can take a look [current as of 2011]. However, going forward you should check with American Express for the most recent version of their regulations.

American Express has the following stance on convenience fees:

Except as expressly permitted by applicable law, you must not:

• indicate or imply that you prefer, directly or indirectly, any Other Payment Products over our Card,
• try to dissuade Cardmembers from using the Card,
• criticize or mischaracterize the Card or any of our services or programs,
• try to persuade or prompt Cardmembers to use any Other Payment Products or any other method of payment (e.g., payment by check),
• impose any restrictions, conditions, disadvantages or fees when the Card is accepted that are not imposed equally on all Other Payment Products, except for ACH funds transfer, cash, and checks,
• engage in activities that harm our business or the American Express Brand (or both), or
• promote any Other Payment Products (except your own private label card that you issue for use solely at your Establishments) more actively than you promote our Card.

Exceptions and special programs

Visa Tax Payment Program
Visa has a Tax Payment Program with special guidelines for convenience fees for entities that accept tax payments such as municipalities or Federal agencies.

Currently, the Tax Payment Program allows a flat convenience fee of no more than $3.95 to be charged for tax payments made with a debit card, and a variable fee (percentage of the transaction) is permitted for tax payments made with a credit card.

I’ve included Visa’s Tax Payment Program Guide because it’s not readily accessible online. However, you should always check with Visa or your credit card processing services provider for the latest information regarding the Tax Payment Program prior to making any convenience fee policies for your business.

Businesses or entities that would like to charge a convenience fee to accept tax payments must be identified with merchant category code 9311, and they must be registered with Visa. Once registered, they must abide by the terms set forth in the Tax Payment Program Guide.

• Visa’s Tax Payment Program Guide

MasterCard Convenience Fee Program
MasterCard allows pre-certified municipal and educational entities to charge convenience fees in certain circumstances. MasterCard’s main stipulation regarding convenience fees charged by educational and municipal institutions is that any fee must be applied equally to all card brands.

This is the reason that many colleges and universities have stopped accepting Visa branded credit and debit cards. MasterCard requires any fee on their cards to be applied equally to all card brands, and Visa forbids convenience fee on anything except tax payments. So, colleges and universities can’t accept Visa if they want to charge a fee for MasterCard, Discover and American Express.

Since it’s not readily available online, I’ve included The MasterCard Convenience Fee Program guide below. At the time of this writing the guide is current, but be sure to check with MasterCard for or your merchant service provider for the latest information on this program before making any decisions about convenience fees within your organization or business.

• MasterCard Convenience Fee Program

How can your business charge customers a credit card fee?

Now that we’ve covered the convenience guidelines for each of the major card brands, let’s look at how your business or organization can charge customers a credit card fee.

Offer a discount instead of surcharging
The major loophole that makes it possible for all business to indirectly charge customers to use a credit card is by offering a discount for cash or check purchases. The devil is in the details of how prices are portrayed to customers.

For example, a retail store would raise the price on everything in the store by 3%, and then place a sign at the register that says, “Get a 3% discount by paying with cash or check.” This roundabout method allows any business to pass processing costs to customers while still staying within the bounds of the terms set by the card brands.

In fact, Visa even mentions this method on their Web site by saying, “Retailers can encourage their customers to use other forms of payment, such as cash and checks, and can discount for PIN debit and cash and checks provided that the offer is made to all respective buyers.” Check it out for yourself here.

MasterCard also mentions discount in their convenience fee guidelines by saying, “A Merchant may provide a discount to its customers for cash payments.”

Thanks in large part to the recent Durbin Amendment, discounting versus surcharging is also acceptable within states that have specific laws banning surcharges on credit or debit transactions. I’ll go over individual state laws regarding surcharging in just a bit.

The downside to discount versus surcharging is that it may make your prices appear higher than your competitors, and you risk isolating or angering customers that prefer to pay with credit or debit.

Raise prices across the board
Many people feel that offering a discount for cash or check payments is a pain, and that it does more harm than good to marketing and customer relations. If you’re of this mindset, the obvious option is to pass the cost of processing to your customers by raising prices across the board.

You won’t have to raise prices by as much as if you were offering a discount for cash because the increase is across all payment channels. A solid 1.5% to 2% price hike will do the trick to soften the blow of processing fees assuming your business has competitive credit card processing fees. An easy way to see if your rates are competitive is to get free instant credit card processing quotes at CardFellow.

Convenience fees on a case by case basis
There are a lot of “what ifs” when it comes to convenience fees, and many people want to know whether the practice is acceptable for their business. If I tried, I’d be answering questions until I was blue in the face. So instead, I’ve outlined the card brands’ guidelines below as they apply to most businesses.

Note: Connecticut forbids surcharges on all forms of payments.

If your business accepts Visa:
Visa forbids virtually all convenience fees, and other card brands say you can’t impose a convenience fee on their cards unless you impose the same fee on all other cards. So, by accepting Visa, you largely negate your ability to charge convenience fees at all.

• You cannot charge a convenience fee under any circumstances if your primary method of acceptance is card-not-present, such as online or mail-order.
  • The only exception to this rule is if your company or organization is classified as MCC 9311, it accepts tax payments, and it’s registered with Visa’s Tax Payment Program.
• You can charge a convenience fee if your primary method of acceptance is card-present (swiping cards), and you would like to offer customers who are unable to come to your place of business the convenience of paying with their credit card either online or over the phone. In such a case you must:
  • The fee must be for a bona-fide convenience. Meaning, it must be charged from something that’s outside your normal payment channel and sales process.
  • Disclose the convenience to the customer prior to completing the transaction so they have the opportunity to cancel the transaction.
  • Charge only a flat fee regardless of the transaction amount. The fee cannot be a percentage of the transaction.
  • Charge the same convenience fee for all card brands and payment types. For example, you would have to charge customers paying with cash the same convenience fee that you charge those paying with a credit or debit cards.
  • The convenience fee must be included as part of the total transaction amount.

If your business only accepts Discover, MasterCard, and American Express:

• You can charge a convenience fee on both card-present and card-not-present credit and debit transactions so long as:
  • The fee is only charged for a bona-fide convenience outside of the typical payment channels and sales process.
  • The fee is applied to all payment channels, including cash.
  • Your fee is capped based on the discount fee you pay on Discover branded transactions. Discover forbids the amount of any convenience fees from exceeding the discount that you pay on the transaction. So, while you can charge a fee, you have to limit the fee across all brands based on the discount fee you pay Discover.

If your business only accepts MasterCard and American Express:

• You can charge a convenience fee on both card-present and card-not-present credit and debit transactions so long as:
  • The fee is only charged for a bona-fide convenience outside of the typical payment channels and sales process.
  • The fee is applied to all payment channels, including cash.

Surcharge regulations by state

Ten states currently have laws pertaining to surcharges and discounting certain payment methods, such as cash. Visa has a good list of these states and their individual laws here, so there’s no reason to outline them in this article as well.

Now, go forth the right way

CardFellow has above outlined the intricacies regarding fees, so go forth and charge (or don’t) accordingly!

#CreditCardFees