Is it permissible for a merchant to impose a fee for credit card payments? Here’s what you need to understand.

Have you ever experienced that unexpected moment at checkout when you present your credit card, only to be informed by the cashier of an additional fee for its use?

Reactions to this situation can vary widely. Some may question the legality of the fee or if the payment processing network permits such charges.

In this guide, we will explore the different types of fees associated with credit card transactions and their legal implications.

Different kinds of fees associated with credit cards that merchants may impose.

Starting January 2013, U.S. merchants gained the authority to impose fees on credit card payments, following a class-action lawsuit initiated by merchants aimed at covering the rising costs of credit card processing fees.

To grasp the various fees, the reasons merchants apply them, and the circumstances under which they are charged, it is essential to familiarize yourself with several key terms. These fees might be known as "interchange fees," "swipe fees," or "credit card processing fees," all of which denote the charges incurred by a business for accepting credit card payments that must be forwarded to the processing network. The credit card processing networks include companies like Visa or American Express, which actually handle the transactions.

It is crucial to highlight that we are exclusively discussing fees for credit card transactions. These charges do not extend to transactions made with debit or prepaid debit cards, even if they are affiliated with a credit card network such as Visa or Mastercard. When transactions are categorized as "debit," the imposition of fees is not allowed by card issuers and is deemed illegal across the U.S. Transaction-related fees are regulated due to the Durbin Amendment of 2011.

Transaction fees

Merchants face processing fees whenever they accept credit card payments. The ongoing rise of these fees was a key factor in the aforementioned lawsuit.

On average, credit card processing fees are about 2% of each transaction. For a $1,000 sale, the merchant owes $20 to the payment processing network for the customer's card. It's important to note that 2% is just the average; fees for American Express and Discover cards are typically higher. Despite the increased costs associated with certain cards, merchants cannot incentivize customers to use specific credit cards over others. A business must either accept all cards from a specific issuer or none, without indicating any preference to customers.

These interchange fees accumulate quickly, prompting businesses to seek ways to cut costs and avoid these charges on credit card transactions, as they can significantly impact profit margins. One strategy to mitigate losses from these fees is to refrain from accepting credit cards altogether. Alternatively, businesses can impose a fee when customers choose to pay by credit card.

Surcharges for credit card payments

It's important to note that credit card surcharges are optional fees that businesses can implement when customers pay with a credit card. Merchants are not obligated to impose such fees. Visa advises merchants to consider the potential effects on customers and the practices of competing businesses before applying these charges.

In the U.S., credit card surcharges are generally permissible, except in states that have banned them (more details below). If a business opts to implement a surcharge for credit card payments, it must clearly itemize the fee on the receipt before the payment is made. Furthermore, both Visa and Mastercard mandate that businesses notify customers at least 30 days prior to the introduction of any credit card processing fee. Businesses must also display a written notice at the point of sale to inform customers.

Credit card surcharges can be categorized into two types:

• Brand-specific fees: These are fees associated with particular credit card processing networks, such as imposing a charge only when a customer uses an American Express card.
• Product-specific fees: These fees apply to certain categories of credit cards, like Visa Signature or World Elite Mastercard.

A merchant may implement either type of surcharge, but not both simultaneously. Furthermore, the maximum surcharge allowed is 4% of the transaction amount or the cost associated with processing that specific credit card — whichever amount is lower. This applies even if the total cost of processing that particular credit card for the transaction exceeds the surcharge amount.

Fees for credit card convenience

Different card issuers and payment processing networks have distinct policies regarding credit card fees:

• American Express: Merchants may add fees to offset administrative costs, as long as these fees are communicated to customers prior to payment.
• Discover: Merchants are not allowed to impose convenience fees on Discover card users unless they apply the same fees to all credit card customers from every issuer.
• Mastercard: Only certain government entities and educational institutions are permitted to charge these fees.
• Visa: Merchants can impose fees on nonstandard payment methods, except in states that ban this fee for income taxes.

In addition to credit card-related fees, businesses can impose other convenience fees that aren't specifically tied to credit card payments. A common example is the fee for using a payment method outside of the usual options a business accepts, such as airlines charging a fee for booking through a call center. Since the airline typically prefers online payments, opting for a different method may lead to an additional charge.

It's crucial to understand that none of these fees can be implemented unless an alternative payment method is offered without an associated fee. This could include options like cash, debit cards, checks, or purchasing your ticket directly on the airline's website.

Minimum purchase thresholds for credit card transactions

Due to the costs linked with credit card transactions, businesses might opt to establish a minimum purchase requirement for credit card payments. This approach helps avoid customer dissatisfaction over additional fees while allowing businesses to refrain from accepting credit cards for smaller purchases. Many businesses find it "not worth it" to incur the fee for accepting credit cards on low-value transactions.

When a business establishes a minimum purchase requirement for credit card usage, there is no obligation to disclose this minimum beforehand. However, state regulatory bodies and credit card processing networks recommend that businesses do provide this information.

Additionally, the minimum transaction amount should be less than $10, and most businesses are not allowed to set a maximum transaction limit. Exceptions apply to federal agencies and institutions of higher education, which can impose maximum transaction amounts.

This regulation applies solely in the U.S. and its territories. In other nations, implementing minimum purchase requirements is not allowed.

States that disallow these fees

Certain states have laws that explicitly prohibit these fees. As of now, credit card surcharges are not permitted in Connecticut, Florida, Kansas, Maine, Massachusetts, New Jersey, New York, Oklahoma, and Texas (with some exceptions).

This does not mean that other states lack similar regulations. However, many of these laws have been deemed unconstitutional by federal courts. Similar legislation has faced challenges, leading some states to cease enforcement to avoid lengthy legal disputes.

Providing discounts for alternative payment methods

Every state in the U.S. permits businesses to offer discounts when customers choose payment methods that do not incur fees for the business, such as cash and checks.

You've probably noticed this at gas stations, where the signage lists one price for cash payments and a higher price for credit card transactions.

In all states, merchants are required to prominently display any discounts beforehand. Moreover, the maximum discount allowed is typically 5% in most states.

What to do if you encounter an unreasonable or illegal credit card fee

If you come across a fee that you suspect is illegal—whether due to lack of proper disclosure, seeming excessively high, or because the business isn't permitted to charge it—what steps should you take?

You can alert the card payment processing network so they can conduct an investigation. Furthermore, you can submit a complaint to the state's attorney general to determine if a merchant is breaching laws or infringing on consumer rights.

Conclusion

It can be quite frustrating to reach for your credit card only to discover an additional fee for using it. The decision to impose these fees and their structure can differ based on local regulations and the options allowed by the payment processing network. If a merchant intends to charge a credit card fee, evaluate the amount of that fee against the rewards you may earn from the transaction. Also, think about whether you are willing to pay a higher price for an item just to earn rewards on your purchase.