Can my business add a surcharge for card-paying customers?
Consult your contracts, state laws before passing along merchant fees
Your Business Credit
Elaine Pofeldt is a journalist whose articles on entrepreneurship and careers have appeared in Fortune, Working Mother, Money and many other publications. She is a former senior editor at Fortune Small Business magazine and an entrepreneur herself, as co-founder of 200kfreelancer.com, a website for independent professionals. She writes "Your Business Credit," a weekly column about small business and credit, for CreditCards.com.
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Dear Your Business Credit,
I am a merchant in California who has to pay
merchant fees for the use of debit and credit cards in my restaurant. I have to
somehow pass on these costs. I have a small statement posted. The statement
reads: "CASH ONLY. All other forms of payment subject to a $0.35 fee."
I am wondering if it is legal, so that I can collect more from debit and credit
card payment customers.
Also, just wondering if you know of a very low interest rate
merchant provider so that I can reduce my fees to credit and debit consumers.
Thank you in advance for your time. -- Mary
Many small business owners are in the same situation as you:
If they don't pass along the cost of accepting debit and credit cards, it's hard,
if not impossible, to turn a profit.
Merchants in any state who wonder if they can add surcharges
to credit and debit card purchases should first review the contracts they've
signed with the card issuers. That's about as much fun as reading the phone
book, but you really need to know what these documents say.
"Most of what retailers can and cannot do involving credit
and debit cards is governed by their contracts with the card companies, not by
state or federal law," wrote J. Craig Shearman, vice president of government
affairs and public relations for the National Retail Federation in Washington,
D.C., in an email. "So the question is not 'Is it legal?' but rather, 'Do the
card companies allow it?'"
Under a court settlement that went into effect in January
but remains under dispute by merchants, retailers in many states can add
checkout fees to credit (but not debit) card payments made by Visa and MasterCard.
Currently, merchants can pass along fees equal to what they pay to accept the
card, up to 4 percent.
However, when merchants add a surcharge to Visa and MasterCard
transactions, they must also add it to purchases on American Express cards. That
leads to a dilemma: Doing this would put merchants in violation of American
Express rules, which block such surcharges. (If you'd like more information
on the subject, I discussed this in an earlier column, "Can a doctor's office charge a credit card surcharge?").
Now let's look at the situation in California. Your state is
one of 10 that bans surcharges. The other no-surcharge states are Colorado,
Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma and
That doesn't mean you can't somehow recoup the costs of
accepting credit cards. Robert Brennan, an attorney in La Crescenta, Calif.,
says that it is very common in California to charge customers who use cash less
than those using credit or debit cards -- and it is legal. "You see this a lot
at gas stations around California, where the cash prices are lower than the
credit prices," he says.
However, be careful about how you structure the deal. The Office of the Attorney General in California says that
while you are OK passing along a discount
to customers who pay cash under a law known as California Civil Code section 1748.1, merchants can't impose a surcharge
on those who use credit cards. Based on that information, it does not appear to
be legal to say you are adding a surcharge to credit card purchases. You might
consider changing your signs to say you are offering a 35-cent discount to
those who pay with cash. If you are located in a shopping center where there is an ATM
nearby, consider posting a sign telling readers where the cash machine is
located. That may encourage some to make a withdrawal and pay you in cash.
The California law doesn't mention debit cards specifically,
according to the Attorney General's office. However, the AG does point out that
your state's laws ban merchants from using unfair or deceptive practices. "If
the cash discount option is not fully disclosed prior to your committing
yourself to the goods or services, or if it does not clearly explain the
merchant's policies regarding debit cards, the merchant may be violating
California law," the AG's website says. I would make sure your sign is
prominently displayed. You may want to post it in more than one location.
To find a cheaper merchant account provider, I would suggest
Account Guide, our sister site, to comparison shop. As you may know, swipe
fees aren't the only type of fees merchant account providers may charge, and
you'll need to look at all of those fees to figure out which service is
cheapest for you.
This is a case where the lowest price doesn't always mean
you've gotten the best deal. If you ever have a problem with your merchant
account, you will want to know that you can get a quick response, and not just
a bargain basement price. Then again, it can't hurt to ask other merchants you
know which provider they use and how happy they have been with their rates. Sometimes,
shopping around can pay off.
See related: Can my business require a minimum purchase for credit cards?, Choosing a credit card processor for a medical practice, Should we charge our customers to use credit cards?
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Published: February 17, 2014