Is it Legal to Pass on Credit Card Fees to Customers?

As a business owner, you can’t just pass along credit card processing fees without ensuring you comply with applicable laws and card brand rules.

This article will explore the types of credit card processing fees and explain what you need to know to stay in compliance. From interchange fees to processing markups, we will examine all the different types of fees that may be charged and why they exist.

Different types of credit card processing fees

The most common is the interchange fee. An interchange fee is a fee the merchant’s bank (acquiring bank) pays the card-issuing bank for each transaction. The major credit card networks, such as Visa, Mastercard, Discover, and American Express, set interchange fees. They can vary depending on the type of card used, the transaction type, and the merchant’s industry.

Another type of fee is the assessment fee, which credit card networks charge. These fees are typically a percentage of the total transaction amount and cover the costs of maintaining the credit card network infrastructure.

Interchange and assessment fees are non-negotiable and must be paid by every merchant on every transaction.

In addition to these basic fees, payment processors may charge additional fees, such as a markup or a fixed per-transaction fee. These fees cover the processor’s operating costs and generate a profit. The specific fees charged by a payment processor can vary widely, depending on the provider and the negotiated terms of the merchant’s contract.

By being aware of these fees, business owners can make informed decisions about their payment processing strategies and negotiate better terms with their providers.

Understanding interchange fees

Interchange fees make up the bulk of credit card processing fees. The interchange fee structure is complex, with over 400 different rates for different types of cards and transaction types. For example, consumer credit cards typically have a lower interchange rate than business or corporate cards, and in-person transactions have lower interchange fees than riskier online or card-not-present transactions.

In addition to card and transaction type, the merchant’s industry and level of risk associated with the transaction influence the specific interchange rate for a given transaction. Merchants with a higher risk of fraud or chargebacks may be subject to higher interchange rates.

By understanding how interchange fees are calculated and the factors influencing them, merchants can work with their payment processors to negotiate better rates and minimize their overall processing costs.

The role of payment processors in credit card fees

Payment processors play a crucial role in the credit card processing ecosystem by facilitating the transfer of information and funds between multiple parties involved in a transaction, not just merchants and card brand networks. They can have a significant impact on the fees that businesses pay for credit card transactions.

Payment processors act as intermediaries between:

The merchant

• The acquiring bank (merchant’s bank)
• The card networks (e.g., Visa, Mastercard)
• The issuing bank (customer’s bank)

Their primary responsibilities include:

• Receiving and transmitting transaction data securely
• Requesting authorization from the issuing bank
• Facilitating the transfer of funds from the issuing bank to the acquiring bank
• Providing encryption and security measures for sensitive financial data
• Offering fraud detection and chargeback management services

In addition to the interchange and assessment fees charged by the credit card networks, payment processors also charge their fees, known as markup or transaction fees. These fees are designed to cover the processor’s operating costs and to generate a profit for the company.

The specific fees charged by a payment processor vary widely, depending on the provider and the negotiated terms of the merchant’s contract. Some payment processors may charge a flat per transaction fee. In contrast, others may charge a percentage of the total transaction amount. Additionally, payment processors may charge additional fees, such as monthly or annual fees, or fees for specific services, such as chargeback management, PCI compliance, or fraud prevention.

Payment processors play a critical role in the payment ecosystem. Businesses need to understand their net effective rate, or what processing a payment actually costs, to ensure they are getting a good deal.

Legal regulations and compliance for credit card processing fees

The legal landscape surrounding credit card processing fees is complex and constantly evolving. Businesses must know the various regulations and compliance requirements governing credit card fees.

At the federal level, the Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009 introduced several regulations to protect consumers from unfair credit card practices. While the CARD Act does not directly address credit card processing fees, issuers must provide clear and transparent information about their fees.

In addition to federal regulations, state-level laws and regulations govern credit card processing fees. For example, some states have laws that prohibit merchants from imposing surcharges on credit card transactions, while others have recently enacted new laws or are considering legislation on the topic:

• New Jersey: As of 2023, merchants can only charge the actual cost of processing the credit card transaction3.
• New York: A 2023 law limits surcharges to the actual cost of processing.
• Colorado: Surcharges are capped at 2% or the actual processing fee cost.
• Maine: Surcharging is allowed, but additional disclosures are required comparing cash vs. credit card costs.
• California: As of July 1, 2024, California effectively banned credit card surcharges. Under the new law:
  • All fees must be included in the listed price of an item
  • Adding a disclosure statement about fees is no longer acceptable
  • Non-compliance can result in fines of up to $1,000 per violation
• Illinois limits credit card surcharges to 1% of the transaction or the actual credit processing fees, whichever is less. Businesses must provide consumers with notice if surcharges are imposed.

Card Brand Rules

Businesses that accept credit card payments must also comply with rules and regulations set by credit card brand networks, aka “card brand rules.” Card brand rules cover a wide range of topics, including the types of fees that can be charged, the methods for disclosing these fees to customers, and the requirements for maintaining secure payment processing systems.

Key Aspects of Card Brand Rules

Fee Regulations

Card brand rules dictate the fees that can be charged and how they should be disclosed to customers.

Security Requirements

Transaction Processing

• Rules covering topics such as:
• Minimum purchase amounts (cannot exceed $10 for credit transactions),
• prohibition of minimum amounts for debit transactions
• , and guidelines for requesting customer IDs.

Merchant Classification

• Merchants should be correctly classified under the appropriate Merchant Category Code (MCC), which affects their interchange rates and allowed card types.

Failure to comply with these legal and regulatory requirements can result in loss of processing privileges, penalties, fines, and potential legal action from customers or card brand networks. As such, businesses must stay up-to-date on the latest changes to laws and regulations and work closely with their payment processors to ensure compliance.

Common misconceptions about credit card processing fees

One common misconception is that all credit card processing fees are negotiable. While it is true that some fees, such as the markup charged by the payment processor, can be negotiated, other fees, such as the interchange and assessment fees, are set by the credit card networks and are non-negotiable.

Another misconception is that businesses can pass on the cost of credit card processing fees to their customers. While some businesses may impose surcharges or add a “credit card fee” to transactions, this practice is prohibited in all states and may be subject to legal restrictions.

Many businesses also believe that they can avoid credit card processing fees altogether by only accepting cash or checks. However, in today’s increasingly cashless society, this is often not a viable option, as many customers expect to be able to pay with credit or debit cards. Failing to accept credit cards can result in lost sales and a less competitive business.

Finally, some businesses believe they can reduce their credit card processing fees by switching to a different payment processor. While this may be true in some cases, the fees charged by payment processors can vary widely. The best way to minimize these fees is to carefully evaluate the terms of the processor’s contract and negotiate for the best possible rates.

How to negotiate credit card processing fees

Negotiating credit card processing fees can be complex and challenging. Still, it is important for businesses to minimize their processing costs.

Businesses must also understand the total cost of payment processing, which is beyond the credit card processing fees. You can read more about that here.

Businesses should research and compare the rates and fees charged by different payment processors. It is essential to understand all fees and how they are applied. For example, a flat rate of 2.99% for all payment cards, credit and debit, is costing the business more money since debit cards cost less to process. You can read more about the differences here.

Monthly fees, account setup fees, equipment rental fees (For point-of-sale terminals or card readers), and statement fees are just some of the fees charged by some payment processors that a promotional or low-ball rate can hide.  You can read more here.

When negotiating with a payment processor, it is important to be prepared and clearly understand the business’s total cost (effective rate) of processing, processing volume, transaction types, and current and future payment channels. Future business channels could include text or Interactive Voice Response (IVR) payments.

In addition to negotiating the overall processing fees, businesses can negotiate for specific services or features that can help reduce their overall processing costs. For example, some payment processors may offer discounted rates for businesses that use specific fraud prevention tools or that process a high volume of transactions.

Tips for reducing credit card processing fees

In addition to negotiating with payment processors, businesses can use several other strategies to reduce their credit card processing fees. Here are some tips to consider:

• Encourage customers to use lower-cost payment methods: Businesses can offer discounts or incentives for customers who pay with cash, debit cards, or other lower-cost payment methods. This can reduce the overall processing fees paid by the business.
• Optimize transaction types: Businesses can optimize their transactions by encouraging in-person transactions over card-not-present transactions, which typically have lower interchange rates.
• Utilize mobile payment solutions: Mobile payment solutions, such as mobile wallets or peer-to-peer payment apps, often offer lower processing fees than traditional credit card processing.
• Implement fraud prevention measures: Businesses that can demonstrate a low risk of fraud may be able to negotiate for lower interchange rates with their payment processors.
• Consider alternative payment processors: Businesses should regularly review their payment processing options and consider switching to a provider that offers more favorable rates or better service.
• Educate employees on credit card processing fees: By educating them on the various fees associated with credit card processing, businesses can ensure that they make informed decisions about their payment processing strategies.
• Explore industry-specific processing programs: Some industries, such as healthcare or nonprofits, may have access to specialized processing programs that offer lower fees or additional benefits.

By implementing these strategies, businesses can work to minimize their credit card processing fees and improve their overall financial performance.

The impact of credit card processing fees on small businesses

Credit card processing fees can significantly impact small businesses’ financial health and profitability. They can be the next highest expense after labor, which can be particularly challenging for small businesses operating on tight profit margins, like retail or food service. Even a slight increase in credit card processing fees can have a noticeable impact on the bottom line, making it more difficult for these businesses to invest in growth, hire new employees, or maintain competitive pricing.

In addition to the direct financial impact, credit card processing fees can create administrative and operational challenges for small businesses. Tracking and reconciling these fees can be time-consuming and complex, diverting valuable resources from other critical business activities.

To mitigate the impact of credit card processing fees, small businesses may need to explore various strategies, such as negotiating with payment processors, encouraging lower-cost payment methods, and implementing fraud prevention measures. By proactively managing these fees, small businesses can improve their financial resilience and position themselves for long-term success.

Conclusion: Making informed decisions about credit card processing fees

In conclusion, understanding the legal and cost implications of credit card processing fees is crucial for businesses of all sizes. From interchange fees to processing markups, these fees can significantly impact a business’s financial performance and compliance with legal regulations.

Businesses can make more informed decisions about their payment processing strategies by educating themselves on the different types of credit card processing fees, the role of payment processors, and the legal landscape surrounding these fees. This includes negotiating with payment processors, exploring alternative payment methods, and implementing strategies to minimize their overall processing costs.

Ultimately, the key to effectively managing credit card processing fees is to stay informed, be proactive, and work closely with payment processors with expertise in fee-based payment processing to ensure your business complies with all relevant laws and regulations. By taking this approach, businesses can optimize their credit card processing costs, improve their financial resilience, and provide a seamless payment experience for their customers.