What Does Passing Credit Card Fees to Customers Mean?
Passing credit card fees to customers means adding an extra charge—often called a surcharge—to transactions paid with credit cards. It’s a way for businesses to offset the fees they pay to card processors, usually around 1.5% to 3.5%.
Businesses may also use a convenience fee, which applies when a customer chooses a non-standard payment method, like paying online instead of in-person.
This practice is growing in popularity, especially among small businesses trying to maintain profits in an inflationary economy.
Why Are Credit Card Processing Fees So Expensive?
Credit card fees are split among multiple parties:
- Card Networks (Visa, Mastercard, etc.): Charge interchange fees
- Payment Processors: Add service and platform fees
- Banks (Issuers): Collect a portion for fraud protection and cardholder benefits
Fees can vary based on the card type (rewards cards often have higher fees) and transaction method (swiped, keyed in, online).
Is It Legal to Pass Credit Card Fees to Customers?
Yes, but it depends on:
- Location: Ten U.S. states and territories limit or prohibit surcharges.
- Card Network Rules: Visa and Mastercard allow surcharges, but merchants must register in advance.
- Disclosure Requirements: You must inform customers clearly before they pay.
Check legal resources like NerdWallet’s surcharge legality map.
The Difference Between Surcharges and Convenience Fees
| Fee Type | Definition | Example | Key Rule |
|---|---|---|---|
| Surcharge | Added only to credit card payments | 3% added for using a Visa credit card | Must not exceed the cost of acceptance |
| Convenience Fee | Flat fee for alternative payment methods | $3 added to pay online instead of in-person | Must apply equally to all card types |
Knowing which fee to use—and when—is crucial for legal compliance and customer satisfaction.Pros of Passing Credit Card Fees to Customers
- Offset Processing Costs: Maintain margins without raising prices across the board.
- Encourages Cash Payments: Reduce chargebacks and transaction fees.
- Promotes Transparency: Customers know who’s responsible for extra fees.
These benefits especially appeal to small businesses with tight profit margins.
Cons of Passing Credit Card Fees to Customers
- Customer Pushback: Shoppers might see it as a “penalty” for convenience.
- Loss of Sales: Competitors not charging fees might win their business.
- Complex Compliance: State laws and card brand rules must be carefully followed.
Bad execution can damage trust and invite legal trouble.
Which Businesses Can Benefit the Most?
Industries where surcharging works well:
- Legal and accounting firms
- Contractors and service providers
- Medical and dental practices
- Online-only merchants
Why? These businesses often deal with high-ticket purchases where card fees significantly impact profits.
How to Calculate a Credit Card Surcharge
Surcharge = (Transaction Amount) × (Processing Rate ÷ (1 - Processing Rate))
Example:
For a $100 charge and 3% rate:
Surcharge = $100 × (0.03 ÷ 0.97) ≈ $3.09
This ensures the surcharge covers the processor fee without violating card rules.
How to Inform Customers the Right Way
Must-Have Disclosures:
- Signage at the point of sale and online checkout
- Itemized surcharge on receipts
- Optional alternative (cash, debit, etc.)
Clarity builds trust and avoids chargebacks.
Should You Offer a Cash Discount Instead?
Some businesses flip the model by offering a cash discount. Instead of adding fees for card use, they give a small discount (often 3-4%) for cash or debit payments.
Pros:
- More positive perception
- May avoid surcharge laws
- Simpler to implement
Cons:
- Requires careful pricing strategy
Best Practices for Surcharging Credit Cards
- Register with Card Brands (Visa, Mastercard, etc.)
- Display Clear Signage
- Use Specialized POS Software
- Ensure Fee Doesn’t Exceed Processing Cost
- Don’t Apply to Debit Cards
Use compliant systems like Clover or SwipeSimple for automated compliance.
Tools That Make It Easy
Modern payment solutions support compliant surcharging:
- Clover: With a surcharge app, fees are calculated automatically.
- Square: Requires custom setup for surcharges.
- North (NAB): Allows surcharging on countertop and mobile devices.
Ask your provider what tools they offer for surcharge compliance.
Case Studies: Real Results from Real Businesses
Dental Practice in Florida:
- Switched to surcharging
- Saved $12,000/year in processing fees
- 98% of customers continued using cards anyway
Retail Boutique in NJ:
- Tried surcharging
- Faced customer backlash
- Switched to cash discounting instead
Lesson? Test and monitor the impact.
How to Talk to Customers About Credit Card Fees
Tips:
- Be honest and transparent
- Emphasize rising bank fees
- Offer a no-fee alternative (cash, debit)
Sample Script:
“To keep our prices low, we pass on a small fee when using credit cards. You’re welcome to use cash or debit instead to avoid it!”
Compliance Mistakes to Avoid
- Charging debit card users a “credit fee”
- Failing to post signage
- Adding more than your actual cost
- Not registering with card brands
Violations can result in fines or termination of processing services.
FAQs
1. Is it legal to add credit card fees in all U.S. states?
No. Some states like Connecticut, Massachusetts, and Colorado limit or ban surcharging. Always check local laws.
2. Can I surcharge debit cards?
No. Card brand rules prohibit surcharges on debit transactions—even if run as credit.
3. Do I need special software to pass fees?
Yes. POS systems must itemize fees and exclude them from sales tax calculations.
4. Will I lose customers by passing on fees?
Possibly. But many accept it if it’s communicated clearly and alternatives are provided.
5. What’s the difference between a surcharge and a cash discount?
A surcharge adds a fee for cards; a cash discount subtracts savings for non-card payments.
6. How do I register to surcharge credit cards?
Notify Visa and Mastercard at least 30 days before starting. Your processor can guide you.
Conclusion
Passing credit card fees to customers can be a smart way to protect your margins—but it comes with risks. When done right, it’s transparent, compliant, and fair. When done wrong, it can hurt your brand and sales.
If you’re considering this strategy, work with a processor that supports compliant surcharging and helps with setup, signage, and customer communication. By understanding the legal landscape, using the right tools, and keeping your customers in the loop, you can turn a cost-saving tactic into a competitive advantage.
