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

Credit card fees and processing fees are very nuanced, and you might be charging in a way that lands you in hot water – know what to do, and how.

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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.

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.

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

The American Genius is news, insights, tools, and inspiration for business owners and professionals. AG condenses information on technology, business, social media, startups, economics and more, so you don’t have to.

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1 Comment

1 Comment

  1. Alex Truedman

    June 25, 2015 at 8:39 am

    If you are dealing with a credit card you will always have to pay, either it’s a Master Card or Visa, reward card or bonus card, low rate card or the plan with charges, it’s a credit and any credit costs money. Why not start saving and using what you actually have, than trying to get more than you can afford? It’s true, the system is built on credits, but is it fair for simple purchasing (I’m not talking about buying a house, of course). There’re instruments which support financially when it’s actually needed (personal loans, for example, you can find out more about urgent loans on onlinepaydaycalifornia.com). Will it be of any use to promote more consuming offering more credit card plan? Not for a long-term perspective.

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Business Finance

Clyde helps smaller brands to offer product protection programs

(BUSINESS FINANCE) For small brands that sell not-so-little items, Clyde is a big deal! Now you can offer product protection normally reserved for the big brands.

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product protection

For small businesses seeking to adapt to their new or growing online presence, Clyde, a platform allowing small business consumers to receive extended warranties and protection on purchases may be the answer.

Due to the current pandemic, online retailers have reported on average, a 200% increase in digital sales. Online commerce is only expected to continue its growth with 52% of consumers suggesting they will not return to in-store shopping, post COVID-19. With online shopping in demand, stolen packages, damaged products, and lost goods are also surging.

If you’re ordering from a superstore like Amazon, Target, or Walmart, chances are your items are protected and will be quickly replaced upon a discovery of any of the above issues. However, for smaller companies, protection on consumer goods is usually not offered, not because smaller companies don’t want to give their customers this option, but because finding insurance for small businesses is hard.

Clyde, a company working to provide product protection programs to small retailers through the navigation and connection to insurance companies, intends to change that. Clyde gives small businesses or as their CEO, Brandon Gell, would say, “everybody that’s not Amazon and Walmart,” the opportunity to provide their customers with individual product protection or an extended warranty contract that can be purchased at checkout.

Clyde also provides the retailer with a portion of the insurance profit, serving as an incentive for smaller companies who usually get left out of this profitable market. Product protection is responsible for a whopping $50 billion market, so getting in on the game is key. The company also provides sellers with critical data analytics, product performance statistics, that otherwise would not be obtainable to smaller companies.

Not only is Clyde protecting consumer purchases, but its mantra acts in the best interest of smaller companies normally left out of big commerce perks. The company’s dedication to provide smaller businesses with access to revenue and its consumers with product protection at a time where the demand is higher than ever may allow this company to flourish.

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Business Finance

Will cash still be king after COVID-19?

(EDITORIAL) Physical cash has been a preferred mode of payment for many, but will COVID-19 push us to a cashless future at an even faster rate?

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No more Cash

Say goodbye to the almighty dollar, at least the paper version. Cashless is where it’s at, and COVID-19 is at least partially to thank–or blame, depending on your perspective.

Let’s face it, we were already headed that direction. Apps like Venmo, PayPal, and Apple Pay have made cashless transactions painless enough that even stubborn luddites were beginning to migrate to these convenient payment methods. Then COVID-19 hit the world and suddenly, handling cash is a potential danger.

In 2020, the era of COVID-19, the thought of all the possible contaminants traveling around on an old dollar bill makes most of us cringe. Keep your nasty sock money, boob money, and even your pocket money to yourself, sir or madam, because I’ll have none of it! Nobody knows or wants to know where your money has been. We like the idea of taking your money, sure, but not the idea of actually touching it…ewww, David. Just ewww.

There is no hard evidence that cash can transmit COVID-19 from one person to the other, but perception is a powerful agent for changing our behavior. It seems plausible, considering the alarming rate this awful disease is moving through the world. Nobody has proven it can’t move with money.

There was a time when cash was king. Everyone took cash; everyone preferred it. Of course, credit cards have been around forever, but they’ve always been just as problematic as they are convenient. Like GrubHub and similar third party food delivery apps, banks end up charging both the business and the consumer with credit cards. It’s a trap. Cash cut out the (greedy) middle man.

Plus, paying with a credit card could be a pain. Try paying a taxi driver with a credit card prior to, oh, about 2014 when Uber hit the scene big time. Most drivers refused to take cash, because credit cards take a percentage off the top. Enter rideshare companies like Uber. Then in walks Square. Next PayPal, Venmo, and Apple Pay enter the scene. Suddenly, cabbies would like you to know they now take alternate forms of payment, and with a smile.

It’s good in a way, but it may end up hurting small businesses even more in the long run. The harsh reality of this current moment is that you shouldn’t be handling cash. No less an authority than the CDC recommends contactless forms of payment whenever possible. However, those cabbies weren’t wrong.

The banking industry has been pushing for a reduced reliance on cash since the 1950s, when they came up with the idea of credit cards. It was a stroke of evil genius to come up with more ways to expedite our lifelong journey into crushing debt.

The financial titans are very, very good at what they do, at the expense of all the rest of us. The New York Times reported on the trend, noting:

“In Britain alone, retailers paid 1.3 billion pounds (about $1.7 billion) in third-party fees in 2018, up £70 million from the year before, according to the British Retail Consortium.

Payment and processing companies such as PayPal (whose stock is up about 55 percent this year) and Adyen, based in the Netherlands (up 72 percent), also stand to gain.”

All kinds of banking-related industries stand to benefit as well. Maybe we’ll go back to spending physical cash one day, but I don’t think there’s any hurry. Fewer old grandpas are hiding their cash in their proverbial mattresses, and the younger, most tech-savvy generation seems perfectly content to use their smart phones for everything.

We get it. Convenience plus cleanliness is a sweet combo. If only cashless payments weren’t such a racket.

If this trend towards a cashless future continues, future travelers may not experience what it’s like to fumble with foreign currency, to smile and shrug and hand over a handful of bills because they have no idea how many baht, pesos, or rand those snacks are. They may not experience the realization that other countries’ bills come in different shapes and sizes, and may not come home with the most affordable souvenirs (coins and bills).

We shall see what the future holds. Odds are, it may not be cash money, at least in the U.S. I hope the cashless movement makes room for everyone to participate without being penalized. We’re in the middle of a pandemic, people. We need to find more ways to ease the path for people, not callously profit off of them.

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Business Finance

How NASA helps small businesses reach for the stars

(BUSINESS FINANCE) NASA has been providing $51 million in grants to small businesses and innovators.

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NASA grants

With the political and social climate that we are all trying to survive this summer, there only seems to be a few things that bring us a light of hope. For some it’s the little gestures that keeps the smiles on our faces; little helping hands that keep us going from day to day. But thanks to some forethought in our government system, there are some rather large helping hands coming down from the top as well. The organization that sends people to the moon is also making some dreams come true here on Earth.

NASA has just announced their latest batch of small business grants. Grants that amount to a total of approximately $51 million. This money is being sent out at the most crucial early-stage of small business funding. Over 300 businesses are receiving up to $125,000 to develop and bring new technologies to the world.

This grant system has been in place nearly as long as NASA itself. The Small Business Innovation Research/Technology transfer program is designed to bring in entrepreneurs and inventors’ ideas, and combine them with NASA’s assets to bring their dreams to fruition, bringing something from the lab to the marketplace.

It is set up into a three-phase system. According to The Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR), the first phase, Idea Generation, provides grantees with up to $125,000 for a 6 – 12 month period to “establish the technical merit, feasibility, and commercial potential of the proposed R/R&D efforts and to determine the quality of performance of the small business awardee organization prior to providing further Federal support in Phase II”. If they succeed, they may be eligible to move onto Phase II, where they will be awarded a new grant of $750,000 for 2 years to continue the R&D efforts and start on a Prototype Development. Phase III is called the Infusion/Commercialization stage and it is the culmination of years of work and grant access for these businesses. This also includes a few extra requirements like matching funding for things like marketing.

Over the years, the selection has covered numerous disciplines with an extraordinary range of industries. Some of the highlights this year are high-power solar arrays, a smart air traffic control system for urban use, a water purification system for use on the moon, and improved lithium-ion batteries. These are just a few of the many innovative projects. The list covers a huge assortment, but a few people have noted the number of neuromorphic computing efforts as well.

This list is updated periodically throughout the year as each deadline is met from previous grant holders. It’s a constantly updating assortment of tomorrow’s toys, and a great way to look toward the future.

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