Surcharging Vs Dual Pricing – What Small Business Owners Need to Know Now (2025)
With costs rising quickly, small business owners are looking for ways to cut costs and increase profits. One area to look at is payment processing costs. For example, Credit cards average 2.6% of each sale. If your business runs a 10% net profit- it takes $26,000 of sales to cover that $2,600.
That’s why business owners look at surcharging and dual pricing programs. They help lower costs and increase profit. The challenge is to find and use a dual pricing program that follows the rules. This is hard because laws and regulations keep changing – California’s “Honest Pricing Law,” also called SB 478, started on July 1, 2024. This law mandates that businesses include all necessary fees in the advertised price of their products or services.
Merchants should know the difference between dual pricing and surcharging to decide what’s right for their business.
Surcharging
A surcharge is a charge added to the price of a good or service. Surcharge fees apply to transactions where the customer chooses the convenience of using a credit card. Surcharges on debit cards are prohibited. Surcharges are a set percentage added to the total cost of goods or services before taxes.
Surcharge fees are currently prohibited in California, Connecticut, Maine, New York, Massachusetts, and the U.S. territory of Puerto Rico. According to card brand rules set by Visa and Mastercard, it cannot exceed 3% of the merchants’ effective rate. Other rules and regulations, like consumer notices, also apply.
Listed below is a summary of what a merchant needs to do to have a legitimate surcharge program:
- Must disclose a surcharge to customers at business entrances and point of sale.
- Do not use creative terms to label a surcharge fee, such as non-cash adjustment, non-cash fee, or service fee.
- Complies with card brand rules of applying a surcharge to the posted price
- Applies surcharge to all card brands equally
- Distinguishes between credit, debit cards, and prepaid cards
- Cannot exceed 3% of the total transaction or the merchant’s cost of processing
- Discloses the surcharge on the customer’s receipt or with notices in-store or online before completing a purchase
- Applied only to U.S. transactions (international transactions are exempt)
Surcharge Laws Can Vary by State
It is important to note that laws are not consistent across states.
In New York, specific rules apply if a merchant wants to surcharge. Merchants must state the policy or price clearly and in advance and not force the consumer to handle the math involved to determine the price of an item if they pay with a credit card.
We suggest that small business owners check the laws in their states before adding a surcharge.
Dual Pricing
A compliant dual pricing program requires merchants to post and advertise credit prices, which include the costs of processing credit cards. When a customer pays with cash or an in-store gift card, the price at the point of sale decreases. Legal cash discount programs present a clear receipt detailing the fee or cash discount amount.
For example, a merchant charges a 4% service fee on each item unless the customer pays with cash. On a $100 item, the advertised price would be $104. Customers paying with cash are exempted from the service fee and pay the original price of $100. By using dual pricing, merchants can eliminate the processing fees associated with credit card transactions.
Why a Dual Pricing Program is Not a Surcharge
Cash discounts are permitted in all 50 states, whereas surcharging is currently prohibited in California, Connecticut, Maine, Massachusetts, and New York.
Often, people associate cash discount programs with surcharging and hybrid, which has caused much confusion for business owners. It is also not a surprise that since the COVID-19 pandemic, there has been an increase in non-compliant cash discount programs. When asked about cash discounting and the confusion that exists, Visa made the following clarifying statement:
“A discount for cash is different from a surcharge. The rule states that the posted price must be for cards; however, merchants can provide a lower price for cash acceptance. Discounts for cash are allowed by Visa. However, merchants are not permitted to post a cash price and then charge a higher price for cards.”
The authority on cash discounting is in the Durbin amendment of the Landmark Dodd-Frank Act.
The amendment says that businesses can give discounts to customers. This encourages them to pay using methods other than credit or debit cards. You can also use checks or cash to get a discount at the time of purchase.
When Dual Pricing is Not Allowed:
Here are a few situations where a cash discount is not allowed:
- Advertised Price: If a business shows a sale price lower than the normal price, it cannot give an extra cash discount on that sale price.
- Financing: When a business offers financing or credit terms, you cannot offer a cash discount. For example, if the business offers 12 months of interest-free financing, it cannot give a 10% discount for cash payments.
- Sales Tax: A business cannot apply a cash discount to sales tax. For example, if a city requires a 5% sales tax, the business cannot provide a 10% discount for cash payments.
When A Dual Pricing Program is Non-Compliant
Dual pricing programs are non-compliant when they post cash prices but add a fee at the point of sale. This type of cash discount program falls under card network surcharge rules, which makes the program non-compliant.
The Penalties are Severe
A non-compliant dual pricing program risks fines and the loss of your merchant account. Fines start at around $1,000 per occurrence and can increase up to $25,000 per occurrence for repeat violations.
Implementing A Compliant Dual Pricing Program
A business must tell customers at least once before they buy that there is a fee for all purchases. They should also let customers know there is a discount when paying with cash.
It is required to put notifications at store entrances, sales areas, and other places in the store. A verbal notice should also be given at the point of sale. It’s essential to use the right words when giving a verbal notice.
For example, “Would you like to save (X amount) today by paying in cash or using your card?” A best practice is for the merchant to have a handy quick reference guide to give customers with additional questions.
Reduce Friendly Fraud Risk
One drawback of accepting credit card payments is the risk of “friendly fraud” or chargebacks. Chargebacks are expensive and can damage a business’s reputation. A business with too many chargebacks will have a high chargeback ratio. This may cause higher fees and lead to losing the ability to process payments. For more detail on chargebacks, please see our post on Chargebacks and How to Avoid Them.
The good news is with a dual pricing program, your business can reduce chargebacks.
Summary
Dual pricing and surcharging can be complicated.
- A program that follows the rules needs a payment provider who knows about fees and the latest laws.
- An experienced payment process ensures your business remains compliant.
- IntelliPay is a payment service made for small business owners and merchants. It helps them reduce or eliminate credit card fees.
- It offers fully compliant surcharging and dual pricing options.
For more information, contact an IntelliPay consultant at 855-877-6632 or http://intellipay.com/talk-to-a-consultant/
