A recent class action lawsuit against Visa and MasterCard resulted in a settlement that allows merchants to start charging their customers a fee for using credit cards — commonly referred to as merchant surcharges or checkout fees(these terms are used throughout this article interchangeably).

In theory, the settlement will allow businesses to reduce the impact of credit card processing fees. However, there are many rules merchants must follow in order to charge checkout fees, as well as pros and cons that should be considered before deciding if charging checkout fees is the right move for your business.

Checkout Fee Basics

As you consider whether or not checkout fees are right for your business, start by familiarizing yourself with some essential information — the difference between checkout fees and convenience fees, the states where merchant surcharging is currently banned, and the procedures merchants must follow in order to start surcharging.

Checkout Fees Vs. Convenience Fees

Even before the recent Visa & MasterCard settlement, merchants were allowed to charge their customers convenience fees for using credit cards in a very limited set of situations. These fees are meant to be used when paying with credit card is "bona fide" convenience over other forms of payment — for example, if the only other option for the customer would be a money order.

Most transactions — including any transaction that is face-to-face, and any transaction done over the phone or online if that is the only method of payment available — fall outside the definition of a convenience fee. CardFellow has an excellent guide to convenience fees, and the rules for these have not changed.

What has changed are the rules regarding merchant surcharging or checkout fees. Checkout fees have historically been defined as a fee charged to consumers who use credit or debit cards that would not have been charged if the consumer had paid with cash or a check. Visa and MasterCard have always prohibited these fees as part of their merchant agreements; Discover and American Express allowed them, but forbid merchants to surcharge their cards differently than any other brands. So, unless a merchant had only accepted Discover and American Express, checkout fees were off the table.

As of January 27, 2013, these rules have changed. Merchants are now allowed to charge checkout fees to customers who use Visa and MasterCard credit cards (NOT debit cards!), and may continue to surcharge Discover and American Express, who were not involved in the recent settlement. There are limits on what merchants can charge and conditions that merchants must meet in order to charge checkout fees — the next part of this article will explore these in depth.

States Where Merchant Surcharging is Banned

If your business operates in any of the 10 states (CA, CO, CT, FL, KS, ME, MA, NY, OK, TX) whose state laws prohibit surcharging, you may not charge checkout fees in that state. However, if you do business in multiple states, you may still surcharge credit card transactions in those states where the practice is not banned.

Hawaii, Illinois, New Jersey, and Rhode Island all have legislation pending that will ban surcharging if passed.

Finally, there is a loophole in these state laws which allow you to offer a discount to customers who pay by cash or check. Many gas stations, for example, already engage in this practice.

How to Get Started

If you're allowed by state law to charge checkout fees, here's the process to get started:

  • Notify the card brands you accept of your intent to surcharge. Visa and MasterCard each have a form that merchants must fill out posted on their respective websites — you can find Visa's here and MasterCard'shere. Each brand requires 30 days notice before you may begin charging checkout fees
  • Inform your acquiring bank of your intent to surcharge as well. Different banks have different procedures; most require 30 days notice as well. Your merchant service provider will likely be able to tell you what needs to be done to meet this requirement.
  • Decide whether you want to charge for only specific types of cards (such as rewards cards, which tend to carry higher costs for merchants) or for all cards issued under a brand. Merchants must choose one or the other — you cannot charge a fee for all cards and an additional fee for card products which have higher processing costs.
  • Prepare your place of business.
    • Both Visa and MasterCard require merchants to post a sign both at the main entrances to their business and at all points of sale notifying customers that their credit card purchases will be subject to checkout fees. The signs on entrances need to inform customers that you charge checkout fees, while the point of sale signs must disclose the percentage that will be added to the transaction.
      • Visa provides signage that merchants can print out and use.
      • Online merchants have to let customers know about checkout fees on the first page of their website that references card brands.
      • For other types of merchants whose transactions are not face-to-face, Visa has published a list of more specific guidelines (see page 14).
    • Checkout fees need to appear as a separate item on receipts. In many cases, your merchant service provider will need to program point of sale terminals to meet this requirement.

Pros and Cons of Checkout Fees

Deciding to charge checkout fees isn't easy — there are pros and cons to doing so, and you should carefully weigh the costs and benefits for your business. The benefits are fairly straightforward:

  • Surcharging can help your bottom line. It's unlikely you'll be able to completely eliminate your credit card processing costs by adding checkout fees, but you can defray a large percentage of them. A "heads up": several industry insiders have predicted that processors will charge merchants the usual rate for any checkout fees added to transactions, so be aware that merchants who surcharge could actually see their processing costs increase.
  • If processing costs are built in to your prices, it's possible that surcharging will allow you to lower prices across the board. This, in turn, could make your business more competitive, especially if most of your customers pay with cash, check, or debit cards.

However, surcharging comes with several disadvantages that make it less appealing. Many large retail chains (including giants such as Home Depot and Wal-Mart) have already gone on record stating that they have no plans to start adding checkout fees, as they believe that doing so would drive away customers. You might consider NOT surcharging if:

  • Most of your customers use credit cards. Remember the principles of supply and demand — if you add a few percent to each transaction, customers who shop with credit cards will buy less. In addition, studies have repeatedly shown that consumers spend more with credit cards than with cash. Even if your customers switch, it's very possible that they will spend less if they feel limited to the cash being carried in their wallet.
  • It is easy to find alternatives to your business nearby. If a consumer can get a similar product or service for the same price across the street, and that merchant that doesn't surcharge, why would they go to the one who does?
  • Your typical transactions are higher dollar amounts. Consumers likely won't flinch over 3% added to a pack of gum; 3% added to the price of a TV is a different story. The more your goods or services cost, the more likely a checkout fee will cause them to buy less — or not purchase from you all.
  • You serve lower-income consumers. The less income a consumer has, the bigger portion of that income a checkout fee would represent, and the more likely that such a fee would impact a buying decision.

Before deciding whether or not to surcharge, consider checkout fees through the eyes of your customers and carefully consider whether those fees will make up for any loss in revenue.

The "Dont's" of Merchant Surcharging

Both the court settlement and the cards brands have outlined specific limits on surcharging in order to protect consumers. If you decide to charge checkout fees, protect yourself from costly chargebacks or other sanctions from your acquiring bank and the card brands by remembering the following:

  • Don't charge a fee greater than your actual credit card processing cost. Visa and MasterCard base this on whatever your merchant discount rate was in the last quarter.
  • Don't charge a checkout fee higher than 4% of a transaction. This limit is outlined in the settlement.
  • Don't surcharge debit cards or prepaid cards. These forms of payment are specifically excluded from the settlement.
  • Don't fail to let your customers know that you charge checkout fees. The exact requirements set forth by the card brands are outlined above — your customers should always know what forms of payment you surcharge, as well as how much you surcharge, before they use their card.
  • Don't keep checkout fees when refunding customers. When issuing refunds, you must also refund any checkout fees that were charged — even for partial refunds. For example, if you refund 50% of a customer's money, you also have to refund 50% of the checkout fee you collected.