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Surcharging Guide: How to Avoid Non-Compliant Credit Card Processing

Giving your customers as many ways to spend money with your business is a must for increasing revenue potential but accepting credit cards also comes at a cost: interchange fees that can eat into your profits. Fortunately, credit card surcharging allows business owners like you to pass those fees along to your customer. Unfortunately, while credit card surcharging is an excellent part of a business strategy, it’s not easy to implement correctly.

Credit card surcharging is subject to laws and rules that are rigid and unflinching, yet nuanced. Laws at the federal level sometimes conflict with state laws, and credit card companies have established their own rules on top of government regulations. Running afoul of any of these—federal or state laws or credit card company rules—can spell disaster for your business and even mean jail time for the unwary business owner.

And naturally, as a result, it can feel overwhelming for business owners to stay informed and ensure they’re compliant. Whether you’re a B2B wholesaler, B2C retailer, or restauranteur, credit cards likely represent a significant source of revenue for your business. Without guidance, it may feel easier just to refuse credit cards altogether, but that limits potentially significant income streams since customers tend to spend significantly more using credit cards than cash.

Credit card processing fees (also called interchange fees) have skyrocketed in the past several years, with U.S.-based merchants paying over 25% more in processing fees year over year.

By passing those interchange fees along to the customer, a credit card surcharge allows customers to retain flexible payment options and also lets merchants accept credit card payments without eating into their profits. With the right guidance and careful planning, your business can benefit from credit card surcharging, too!

Credit Card Surcharge Compliance at the Federal Level

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At the federal level, surcharging has been a contentious issue for decades. Credit card companies have historically wanted to prohibit merchants from using dual pricing schemes to offset interchange fees, but Congress allowed credit card surcharging under federal laws thanks to legislation enacted in 1974. Just two years later, the credit card industry successfully lobbied to have the practice banned, albeit temporarily.

After much debate, Congress allowed the ban to lapse in 1984, making credit card surcharging technically legal at the federal level. Credit card companies moved their fight against surcharging to the state level, and successfully lobbied many states to ban the practice. They further undercut the federal allowance for credit card surcharging by including language in their merchant agreements that contractually forbid them from enacting a surcharge.

While most states now allow credit card surcharging, the policy has existed in limbo throughout the US. Federal courts in California and New York weighed in and determined that a ban on surcharging was unconstitutional. Much of the debate surrounding surcharging at the federal level, as well as the state level, has centered on concepts such as freedom of speech and government interference in the free market. Nationally, credit card surcharging has become a permissible way for merchants to offset interchange fees, provided they follow a few specific rules laid out in their contracts with the credit card companies as well as state laws.

Credit Card Surcharge Compliance at the State Level

Like most legal documents, state laws surrounding credit card surcharges are sometimes complicated. While credit card surcharging is legal at the federal level, regulations vary from state to state, with a couple of holdouts still not allowing it.

As more states allow merchants to apply a surcharge to offset the cost of credit card processing, they have also written specific legislation dictating how the surcharge must be implemented. Some states have signage requirements down to the exact language that must be used; compliance with disclosure laws can be tricky with this many moving parts.

Case Study for Changing State Laws

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In 2017, a group of five merchants in New York challenged state laws on the mandatory wording used to notify customers about credit card surcharge policies. At the time, regulations dictated merchants could frame their surcharge as a discount for cash payments but not a fee for using credit cards. In fact, accurately framing a surcharge as a surcharge resulted in up to a year of prison time!

The case went to the Supreme Court became known as Expressions Hair Design v. Schneiderman. CardX’s own Jonathan Razi participated in the case, arguing for clarity and common-sense surcharging regulations.

Whether you describe it as an added fee for credit card purchases or a discount for using cash, establishing two prices to offset interchange fees is a common way to do business. Theoretically, customers could:

  • pay $10.20 for an item but get a 2% discount for using cash, or
  • pay $10 for an item but incur a 2% surcharge for using a credit card.

No matter how you frame it, the outcome is the same. Under the old laws in New York, however, the latter scenario was a crime. Regarding the case, Razi says: “Merchants should be able to communicate costs freely.”

This case was successfully resolved in favor of the merchants’ right to communicate clearly with their customers, without fear of legal penalties for what ultimately came down to a question of phrasing.

Though Expressions Hair Design v. Schneiderman had a happy ending, New York’s previous surcharging law is just one example of the complex and constantly evolving legal requirements.

Payment Processing Compliance and Data Security

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Okay, so we know different levels of government create various laws for surcharging and general payment processing. But there’s more. The major credit card companies set their own surcharging rules that merchants need to comply with, too.

When setting up your credit card surcharge, there is a list of rules established by credit card providers, and each card brand may set its own rules. While the rules for most major credit cards are virtually the same, there are variations.

In general, the credit card surcharge rules set by companies like Visa and MasterCard will fall along these lines:

  1. Merchants must notify the credit card company of their intention to implement a credit card surcharge a certain number of days (usually 30) before its implementation.
  2. The surcharge must be applied only to credit card payments and never to payments made with debit or prepaid cards.
  3. The surcharge rate must stay below the cap, and merchants must not make a profit on a credit card surcharge.
  4. Merchants must advise customers of the credit card surcharge. The exact wording and signage requirements are incredibly specific, down to the size of the letters and what fonts you may use.
  5. Merchants must follow all other fine print requirements, most of which avoid any actions that make it more appealing to use one type of credit card than another.

Credit card companies don’t just depend on the honor system to ensure merchants are following surcharge regulations. Companies may audit merchants using secret shoppers as well as based on customer complaints.

Non-compliance with the rules set by credit card companies can lead to severe consequences for business owners. While the companies can’t threaten you with jail time for violating their policies, the fines they can levy are steep:

  • Fees for infractions start at $5,000 for most violations and go up.
  • Violations that aren’t remedied in the given time can fetch fees closer to $25,000.
  • You could also lose the privilege of accepting credit card payments, further compromising your income.

A Note on Data Security Breaches

There is one area of noncompliance that deserves extra attention: it’s vital to protect your customers’ private information.

The Payment Card Industry Data Security Standard (PCI-DSS) was established in 2006 as a standard for information security. Failing to comply with this standard can land you in hot water and even cost you your entire business.

Especially if you do online transactions, safeguarding your customers’ financial information is paramount. When data security breaches happen to large companies, it’s headline news. Many business owners don’t realize how risky potential non-compliance is for small businesses.

Data Breaches Can Spell Disaster for Your Business

Failing to comply with PCI standards can leave you facing federal audits, hefty financial penalties, and legal action, including compensation costs for affected customers. And if you make it through the financial and legal storm, you’ll also have to deal with the damage to your reputation and loss of business as your customers lose faith in you to safely handle their financial details.

Data breaches don’t just affect one customer or a handful of customers. Instead, they expose anyone who has used your payment platform at the time of the breach. For high-volume businesses, that could mean hundreds or even thousands of customers. As a result, your business would be vulnerable to lawsuits from each of them individually, in addition to broader legal actions from regulatory bodies.

Every time a customer hands over their credit card number to your website or business, they express trust. They trust you to have established and implemented adequate protections on their behalf. Reputational damage can have lingering effects for a prolonged time following a data security breach. When customers lose faith in your ability to safeguard their information, they’ll be unlikely to trust you with their financial information again.

Security breaches compromise your business’s health in various ways, and it can be hard to bounce back afterward. When choosing a payment processing service, you must know that your business and customers’ information is in good hands.

Avoiding Non-Compliance with Credit Card Surcharge Regulations

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Staying informed about the various credit card surcharge rules and regulations can take time and effort. Implementing your credit card surcharge can certainly induce anxiety when you know the steep penalties you could face for non-compliance with surcharging regulations.

Improperly communicating your policy to customers is one of the easiest ways to break state laws related to credit card surcharges. And if you do business online, you’ll also need to stay on top of surcharging regulations in other states!

Since the penalties for non-compliance can be severe, it’s in every business owner’s best interest to ensure their payment processing and credit card surcharge policies follow every regulation to the letter.

But avoiding non-compliance can feel like a full-time job in and of itself.

Staying PCI-DSS compliant takes technical know-how and constant vigilance. Your IT team will need to set up and maintain appropriate firewalls, restrict and track how employees and contractors can access information, regularly update antivirus software, and so on. Information security threats are constantly evolving, so you need strategies that can keep you two steps ahead of them.

Avoiding non-compliance with surcharging regulations puts further demands on business owners. Keeping informed of changes to interchange fees, as well as the laws and rules around surcharging, can be a challenge. And then there’s the question of correctly interpreting those laws and rules to avoid missteps.

“As surcharging becomes available in more jurisdictions, we’re seeing a shift to more prescriptive surcharging law—lawmakers want to permit surcharging but define affirmative requirements for surcharging ‘the right way,’” Razi says.

The details of those requirements are fraught with potential pitfalls for merchants. Phrasing your notices the wrong way, listing your surcharge improperly on the customer’s receipt, charging the wrong amount—sometimes it can feel like there are more ways to break surcharging regulations than strategies to follow them!

How CardX Can Help

Our mission at CardX is to help merchants keep the money they make by protecting their profits against processing fees and safeguarding their business against the costs of non-compliance. We take that mission seriously, which is why we tackle it from multiple angles.

First, we’re active in shaping the laws that dictate how merchants can do business and communicate with their customers. Jonathan Razi has advocated for merchants in several legal actions and court cases.

Payment processing and credit card surcharging laws should be clear, common-sense rules that don’t leave business owners vulnerable to “gotcha” tactics and unclear guidelines. As Razi puts it, “lawmakers [should] develop a balanced, pro-consumer, pro-market framework that harmonizes with surcharging best practices nationally.” That’s why CardX is a proud leader in the drive for better surcharging regulations across the nation.

Second, CardX is helping rewrite how customers see credit card fees. Many merchants find themselves forced to raise prices across the board without a way to offset the cost of processing credit card payments. Credit card surcharging gives business owners another option.

“Businesses operating with tight profit margins often really benefit from surcharging,” Jonathan Razi says, “because their alternative for taking cards when rates go up, as they have in the past, is to raise prices on their products.” This inevitability has been a cornerstone revelation in CardX’s advocacy efforts to create credit card surcharge regulations that work. In one case, “the judge pointed out that such a scenario results in cash and debit payers paying more because someone else is using credit cards,” Razi continued.

Many merchants are hesitant to incorporate a credit card surcharge into their business, fearing their customers may resent the fee. However, when explained appropriately, customers are overwhelmingly accepting of the practice.

Third, we protect your business and your peace of mind by providing everything you need to incorporate fully compliant payment processing and credit card surcharging into your business. You won’t have to worry about staying updated with changes to surcharge regulations. You can rest easy that your customers will enjoy secure transactions every time. We even provide regulation signs to post!

CardX provides 100% compliant payment processing you can depend on without adding any workload to your already busy day. You’ll keep the whole pie for every credit card sale, meaning you can keep doing what you do best without cutting into your profits or raising prices for your customers. Best of all, you’ll be able to rest easy knowing we’re protecting you against all the problems non-compliance can cause.