Navigating the Complex Landscape of Card Brand Surcharging Rules

By ETA Industry Affairs Payment Sales & Strategy Committee

FEE CLARIFICATIONS
Surcharging is the practice of adding an extra fee or price to a product or service. More specifically, a surcharge defined is an additional fee that a merchant adds to a customer’s bill when they choose to pay with a credit card rather than other methods of payment, such as cash or debit card.

A convenience fee is a charge passed on to customers for the privilege of paying for a product or service using an alternative payment channel that is not standard for a business. A business that traditionally accepts payments for transactions in one channel (normally once-to-face) but also sells goods in a more convenient alternative channel (normally Telephone or Ecomm) and may charge an additional fee for that convenience.

A service fee is a type of convenience fee program with a modified set of rules. The program is also restricted to merchants within specific merchant category codes (MCC) primarily under education and government merchants.

THE IMPORTANCE
Surcharging has garnered a lot of attention due to recent rule changes and an increase in non-compliant surcharge practices.  Consumers have also become more aware and concerned about these additional costs.  There is an ongoing debate about the legality and fairness of certain types of surcharges, leading to calls for stronger consumer protections.

The legality of surcharging depends on the jurisdiction and the specific context. In the United States, businesses are generally allowed to impose surcharges for credit card transactions, but the practice is regulated by both state and federal laws, and there are several states where it is illegal moreover, surcharging is never permitted on debit cards.  Similarly, in Canada, the European Union and a few other countries, businesses are allowed to impose surcharges, but the circumstances are restricted, and the amount can only reflect the actual cost of processing the payment.

Some regions/states are revising laws related to surcharging, causing the subject to be discussed more.  States currently prohibiting or limiting surcharging include Connecticut, Maine, Massachusetts, Oklahoma and most recently, New Jersey.

THE DOWNSIDE OF SURCHARGING
Some of the most common concerns and downsides with surcharging include:

Customer Dissatisfaction: Customers perceive surcharging negatively as they view it as an additional, unexpected cost. This leads to reduced customer satisfaction and loyalty, which can impact long-term business growth.

On average, over half of consumers had a negative opinion of their latest transaction that had a card friction such as a surcharge.  Though legal, and allowable if done compliantly, consumers report negative impacts as a result, citing negative perceptions of the experience and the surcharging merchant itself, and that the cost and practice is unfair.

A recent market study which included direct surveys of both consumers and SMB’s reported that when faced with surcharging, 36% of consumers completing their transaction with a credit product ‘purchased less’ or ‘somewhat less’, and 43% did so if faced with a non-compliant debit card surcharge.

Additionally, every merchant category sees a significant drop in transaction ticket size and transaction counts among merchants that are not compliant in surcharge. Non-compliant practices are most often improperly executed ‘cash discounting’ or dual pricing’ models, which declare all represented prices to the consumer as previously ‘cash discounted’ and then add ‘non-cash fees’ if paying by card (both credit and debit). Programs executed in this manner essentially misrepresent price and discount to the consumer and are non-compliant surcharge models.

Competitive Disadvantage: If rival businesses choose not to apply surcharges, customers prefer purchasing from them to avoid paying extra costs.

Studies show a portion of consumers refuse to return to an SMB that applies a card friction such as a surcharge.  As it relates to their most recent experience, 16% of Consumers say they will not return to the SMB.  And, as a result of this, consumer behavior, the average economic outcome for SMBs (and for most everyone in the value chain) that apply a surcharge is negative.  Both Consumers and SMB’s report surcharging prompts reduction or abandonment of transactions.  At restaurants, tipping for service is often negatively impacted when consumers face surcharge fees, further impacting an establishment’s economics.

Regulatory Requirements: Surcharging policies are strictly regulated. Non-compliance with state, national, or card network rules can lead to legal complications and fines. Compliance requires resource investment to ensure legalities are maintained, especially for businesses operating internationally or in multiple states where laws may differ.

Administrative Burden: Implementing surcharges can be complex. It involves modifying payment systems, training staff, ongoing monitoring to ensure compliance and potentially dealing with increased customer queries or complaints.

Reduction in Sales: The added cost deters customers from making high-value purchases or often, making a purchase at all leading to a decrease in overall sales volume.

Studies show merchants who implement a surcharge see approximately a 10% reduction in same store debit and credit sales as customers change their purchase behavior to offset the fees, much higher than the surcharge income for merchants.

High Cart Abandonment Rate: E-commerce businesses experience an increase in cart abandonment rates when customers see the extra fees at the final checkout phase. 30% of consumers say they ‘always’ or ‘mostly’ abandon the purchase when a card friction such as surcharging is present.

THE ALTERNATIVES
Cards are an important payment method for both merchants and consumers and yet more than half of SMBs are applying a card friction such as a surcharge.  Nearly seven in ten consumers prefer to use debit cards or credit cards for everyday spend and collectively cards make up 70% of consumers’ everyday spend. It is important for businesses to consider the impact on customer satisfaction before implementing a surcharge.

As an alternative, merchants can consider the following:

Going Cashless: 56% of SMBs that are Cashless would strongly recommend it.  SMBs report the average cost of accepting cash is ~2.1% of the total transaction.

Increase Revenue: Drive repeat business by developing customer loyalty programs and rewards.  The use of loyalty programs encourages customers to make repeat purchases, and rewards motivate consumer to purchase more. Another way to increase incremental revenue is to offer a tipping function.

Reduce acceptance frictions: 34% of consumers report a tendency to spend more when using their credit cards, yet introduction of card acceptance frictions or surcharge fees may discourage this incremental spend. Open and compliant acceptance practices drive greater consumer experiences and satisfaction.

Surcharging, if executed compliantly is allowed, but should be approached strategically, considering the customer experience and resulting perceptions in frequenting a surcharging merchant, as well as any negative financial impact, like loss of business and merchant reputation that may not be immediately obvious but may develop over time.  Businesses need to balance the benefits of the cost savings against these potential downsides and align the strategy with their larger business objectives. Should adoption of an acceptance friction such as surcharging, cash discounting or dual price models be adopted, a merchant should take great care that it is executed in accordance with their state and local laws, full consumer transparency and compliant with network rules and guidelines.

Synthesis and outputs developed by Glenbrook Partners
Consumer and SMB research efforts supported by RTi Research