Effective April 15, 2023, Visa has implemented a reduction in the permissible merchant surcharge to the lower of: (a) the merchant discount rate (MDR) for the applicable credit card or (b) 3%. The MDR is the fee charged to the merchant by the payment processor for credit card transactions. This is also called the cost of acceptance. This effectively caps the permissible merchant surcharge for Visa customers at 3%, down from the previous cap of 4%. For Mastercard customers, the surcharge cap remains 4%.

The majority of states permit surcharges. However, there are full bans in effect in Connecticut, Maine, Massachusetts, and Oklahoma, and several other states have imposed some restrictions or have partial bans in effect.[1] While state statutes banning or restricting surcharges are clearly focused on consumer protection, most state laws do not distinguish between individual consumer transactions and business to business transactions. Thus, any entity imposing a surcharge needs to be in compliance with the credit card’s own regulations but also with applicable state law. Merely operating one or more locations in a state that bans surcharges, however, will not prohibit the entire company from imposing surcharges on transactions that occur outside that state. This is because a state’s laws generally apply only to transactions and operations in that state. As such, companies are free to move as much of their processing and fulfillment as possible to states that do not impose restrictions on surcharges.

Explanation of Merchant Surcharges and Consequences for Non-Compliance

A merchant surcharge is the fee added to a customer’s bill by the merchant, which is not charged on other accepted forms of payment (e.g., cash, check, debit cards, prepaid cards, etc.…). Surcharges allow businesses to pass along the costs of the credit card processing fees (often between 1.5%-3.5%) to their customers. Before beginning to surcharge its customers, a merchant is required to notify the acquirer (the institution processing credit card payments for the merchant) at least 30 days in advance. At the point of sale, both in-store and online, the merchant surcharge policy must be disclosed. Major credit cards such as Visa have sample disclosure language available for download on their websites.

Credit card companies limit the surcharge to, at most, the cost of acceptance. However, Visa’s decision to reduce the cap from 4% to 3% means merchants may now not necessarily be able to pass on the full cost of payment processing on all credit card transactions. In other words, if processing fees for a Visa card exceed 3%, the merchant is still only able to impose a maximum surcharge of 3% and must bear the remaining cost.

Noncompliance with Visa’s merchant surcharge rules are governed by Visa’s Visa Core Rules and Visa Product and Service Rules,[2] which impose a series of escalating and compounding fines for noncompliance. When non-compliance is first identified, Visa can impose an immediate $1,000 fine and issue a request for a remediation plan. Subsequent and continuing violations increase and compound, up to $150,000 if 150 calendar days have passed and non-compliance continues. After 180 days, the penalties increase by $25,000 each month until the rule violation is corrected.[3] A summary of Visa’s fines for noncompliance is set forth below:

Alternatives to Surcharge

A cash discount or incentive is a “discount” offered by the merchant to the customer for paying with cash, check, or some other acceptable form of payment other than a credit card (thereby sparing the merchant from paying credit card processing fees). Visa allows merchants to offer a cash discount but requires that merchants display their prices either by showing (a) only the card price per item or (b) both the card and cash price per item listed side by side. In essence, the emphasis is that the higher (credit card) price be displayed, so that customers are not mislead into paying higher prices for using a credit card.

Federal law also mandates that credit card issuers cannot prohibit merchants from offering a cash discount.[4] However, distinguishing between a ‘cash discount’ and a ‘credit card surcharge’ becomes important in states where merchant surcharges are prohibited or restricted. Certain states, such as California, allow a merchant to offer a cash discount, but have restrictions on merchants choosing to impose a surcharge.[5] Under California law, if the merchant imposes a surcharge and fails to return that amount upon the cardholder’s written demand within 30 days, the merchant is liable for three times the amount of the damages assessed, plus attorney’s fees and costs.[6]

In 2018, the Ninth Circuit found California’s law against merchant surcharges unconstitutional as applied in a specific case, where several restaurant owners challenged the law.[7] Because California’s law was invalidated only as to the application in that case, California’s law remains on the books, and could potentially be applied in other ways. Similarly, in 2017, the Supreme Court found New York’s law regulating merchant surcharges regulated “how sellers may communicate their prices”[8] and vacated and remanded the case to the Second Circuit. Notably, given the public policy goals of the state laws, these successful challenges were brought against the merchant surcharge laws as applied to restaurants and retail businesses, not against applications of the law in a business-to-business context. Moreover, despite the increasing number of successful challenges to state bans as unconstitutional restrictions on speech (as applied), there has not yet been a definitive ruling from the Supreme Court invalidating all state bans or restrictions, which has allowed state laws to remain in place.

Another possible alternative to surcharges and cash discounts is that a merchant whose customers primarily pay with a credit card could simply increase prices or include a surcharge on all purchases, irrespective of payment method, in order to cover the cost of credit card processing fees. Thus, merchants could avoid the potential issues with restrictions or bans on merchant surcharges, as the issues arise when there is disparate treatment of payment methods, and the potential for deceptive pricing.

In summary, courts seem to recognize there is little economic distinction between a cash discount and a merchant surcharge such that state statutes prohibiting merchant surcharges are regularly found to violate the First Amendment. Thus, in light of Visa’s recent policy change, which specifically only pertains to surcharges, cash discounts (which have been viewed favorably by the courts) remain a viable alternative to merchant surcharges, provided that the merchant is careful to comply with the credit card issuer’s policy, as well as applicable law — the crucial distinction being generally that the higher credit card price be clearly shown as the standard price, and the price for using cash is treated as a “discount” from that standard (credit card) price. Similarly, merchants whose customers generally pay in cash may also choose to simply avoid the surcharge/cash discount issue and instead adopt a surcharge on all payments.

Conclusion

Merchant imposed surcharges and alternative ways to recoup the costs of accepting credit cards — such as cash discounts — are subject to evolving regulatory strictures and there can be serious penalties for failing to comply with changing provider regulations as well as evolving law. Thus, merchants who wish to recoup such costs should monitor developments and evaluate their procedures in this area regularly to minimize risk or consider contracting with a trusted third party that provides surcharging services in compliance with the myriad different regulations.

[1] Colorado, for example, limits all merchant surcharges to 2% regardless of the regulations imposed by the credit card companies.

[2] https://usa.visa.com/dam/VCOM/download/about‐visa/visa‐rules‐public.pdf.

[3] Visa notes the “Non‐compliance assessment amount is cumulative to include any previous amounts levied (for example: where 90 days have passed since response is due and a Level 4 non‐compliance assessment is levied, the total amount equates to USD 251,000 i.e., Level 1, Level 2, Level 3, Level 4, plus initial fee).”

[4] “With respect to credit card which may be used for extensions of credit in sales transactions in which the seller is a person other than the card issuer, the card issuer may not, by contract or otherwise, prohibit any such seller from offering a discount to a cardholder to induce the cardholder to pay by cash, check, or similar means rather than use a credit card.” 15 U.S.C. § 1666f(a).

[5] “No retailer in any sales, service, or lease transaction with a consumer may impose a surcharge on a cardholder who elects to use a credit card in lieu of payment by cash, check, or similar means. A retailer may, however, offer discounts for the purpose of inducing payment by cash, check, or other means not involving the use of a credit card, provided that the discount is offered to all prospective buyers.” Cal. Civ. Code § 1748.1(a).

[6] Cal. Civ. Code § 1748.1(b).

[7] Italian Colors Rest. v. Becerra, 878 F.3d 1165 (9th Cir. 2018).

[8] Expressions Hair Design v. Schneiderman, 581 U.S. 37, 47, 137 S. Ct. 1144, 1151, 197 L. Ed. 2d 442 (2017).