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How to Calculate Credit Card Surcharges

Wondering how to calculate credit card surcharges? Surcharge fees allow retailers to recoup some of the expenses associated with processing credit card payments. In theory, a surcharge fee is quite simple: Just charge customers a few percent to cover back-end costs to maintain a good profit margin.

In reality, there are a number of laws and rules imposed by the government and card issuers regarding the if, when, and how of credit card surcharging. Here’s how to calculate surcharges to ensure that you’re within the confines of the law.

How to Calculate Credit Card Surcharges

The rules for implementing a surcharge fee are limited to credit cards, meaning that you cannot impose a surcharge on prepaid and debit card transactions. Here’s how to calculate credit card surcharges along with some information specific to the biggest card brands.

1. Notify the Brand of Your Intent to Surcharge

All card issuers expect to be notified before you implement a surcharge, but this is merely a formality. Mastercard and Visa allow you to do so online. The form will ask for your merchant name, contact information, the number of locations, the type of channel, and the type of surcharge, which is explained below.

2. Choose the Type of Surcharge 

Mastercard and Visa allow you to impose a surcharge at the brand level (that is, for all Visa credit cards) or the product level (for example, World Elite Mastercard). You can change your fee structure later, but you’ll need to notify the card brands of the change.

A brand-level surcharge is simpler to calculate, as it means applying the same surcharge fee to all Mastercard credit cards, for example. However, the product-level surcharge can allow you to cover costs more accurately, which becomes obvious as you learn about the caps.

3. Find the Applicable Surcharge Cap 

The surcharge fee cannot be greater than the costs associated with accepting a given brand’s credit cards. As such, you’ll need to determine the “cap,” which is the highest surcharge fee you can implement. The cap is different depending on whether you implement a brand-level or product-level fee.

  • For a brand-level surcharge, compare the average effective merchant discount rate and the maximum surcharge cap of 4%. Whichever value is less represents the maximum surcharge fee you’re allowed to charge.
  • For a product-level surcharge, figure out the cost to accept that card product, ensuring it does not exceed the Durbin Amendment’s cap, and that is the maximum surcharge fee you’re allowed to charge.

4. Compare Estimated Brand Surcharges

Learning how to calculate credit card surcharges seems pretty straightforward if you have all your numbers in front of you, but that’s not the last step. Card brands are openly opposed to surcharging, primarily out of fear that it will drive customers to another form of payment. Worse yet, if you choose to surcharge only one brand (for example, Visa) and not another, it can drive a customer to use a competitor’s product instead.

Visa, for instance, explicitly states that merchants can choose to impose a surcharge fee on only Visa credit products, but they follow it by saying that “merchants must surcharge Visa on the same terms and conditions as any equal or higher cost competitor that imposes limits on surcharging.”

Mastercard uses similar phrasing, stating: “For merchants that accept other brands of credit payment networks … the circumstances in which such a merchant could surcharge Mastercard cards [depends] on the costs of those brands to the merchant and those brands’ surcharging restrictions.”

The legalese in these explanations boils down to contacting your acquirer for information on the specific rules that may apply given your industry, processing costs, and the brands that you accept (such as Visa, Mastercard, American Express, Discover or PayPal).

Tips for Implementing Surcharges

It’s never an easy decision for a business to implement a new fee or raise prices, but if you’ve decided that surcharging is the right way forward, it’s important that you triple-check the rules. Before you take the next step, here are some final tips:

  • Check your state laws to ensure that surcharging is legal. Some states continue to restrict surcharging.
  • Consider implementing a credit card minimum (of no greater than $10) as an alternative to a surcharge fee.
  • Make sure you display appropriate signage at the entrance and point of sale. Visa offers sample signage that you can use to disclose your surcharge fee.

If you’re still on the fence about surcharging, remember that you do have other options. Aside from raising prices, look at the problem from the other end of the equation and try to decrease your processing costs. LOLA POS can help you get the best rates.

About LOLA POS

LOLA POS is a merchant advocacy group dedicated to reducing or eliminating the unnecessary fees associated with accepting credit card payments. Since 2004, LOLA POS’s payment processing solutions have been delivering tailored solutions, best-in-class customer service, and high-quality service offerings for businesses across multiple industries. Whether it’s high-risk or low-risk, brick-and-mortar or e-commerce, LOLA POS will create the best processing experience for your company.

For more information, visit us at our www.lolapos.com or call (866) 509-7199.

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