To surcharge or not to surcharge? Making sense of payment method incentive programs.

To surcharge or not to surcharge? Making sense of payment method incentive programs.
Kelly Andrus Director, Collaboration Merchant Advisory Group
May 24, 2023

Merchants who want to incentivize customers to use a lower-cost payment method can surcharge credit card transactions, perhaps charge a convenience fee, or even offer a cash discount. But merchants beware: a complex matrix of rules stands between you and the decision. As you begin to consider surcharging, it is important to consider the tangled web of requirements to be evaluated from multiple sources including case law, legislation, court actions, state/city laws, card brand rules, and even your own merchant agreements. 

The card brand rules and state laws vary for surcharging, convenience fees, and cash discounts, and, in some cases, overlap or contradict what other card brand rules allow. Sounds confusing, right? That’s because it is. For example, if a merchant wants to surcharge Visa credit cards, they will need to review their American Express contract. Wait a minute – why should a contract for another card brand be relevant? Shouldn’t each card brand’s rules be applicable to only their cards? You would be surprised how complex the rules are for merchants who wish to add a surcharge to a transaction.

In April, Visa reduced the surcharge cap a U.S. merchant can charge from four percent to three percent. This is the new maximum amount a U.S. merchant can surcharge on any Visa credit transaction. While I have read several articles that focused on the reduced surcharge cap, none seemed to capture all the changes related to the updated rule. For example, merchants who surcharge Visa credit card transactions used to have to register their programs directly with Visa but now they must register with the merchant acquirer. Additionally, U.S. merchants are now required to populate the surcharge amount into a specific data field within the authorization and clearing records of the transaction. Programming card-specific changes to Point of Sale (POS) systems and software or checkout pages are complex, time-consuming, and requires considerable lead time. Many larger merchants likely had their 2023 development schedules locked in before ever hearing about this change, and many smaller merchants rely on vendor-supplied POS systems and software and may not know if their systems have been updated to comply with the new network rule(s).

The Merchant Advisory Group’s (MAG) Surcharge Community of Practice (COP) came together last year to break through the nebulous rules and information around incentives programs and break down the complexity. We have researched the nuances for months and will soon publish a consolidated matrix, organized by card network, which contains the key considerations a merchant evaluates when deciding whether to implement a surcharge or convenience fee program.

The Surcharge COP identified the core areas of consideration, along with the interpretation of the spider web of rules to provide MAG merchants with a helpful, fact-based document. If you have tried to research the complexities of surcharging on the internet, you may well know what a difficult task this is. You will find countless articles and publications that often tell part of the story, may be outdated, may contradict each other, or use the same terminology interchangeably. The card brands use jargon in their rules specific to their own company, which may be confusing and seem inconsistent with the other brands’ rules.  The COP uses terminology that we feel aligns across the networks and conforms to the generally accepted terminology among industry stakeholders. Terms are also defined where needed. Look for an upcoming MAGMail when the merchant resource is published.

Participation in the Surcharge COP and the COP’s output are examples of how merchants benefit from their MAG membership. Merchants are willing to share insights into the industry, be it new payment trends, rules change impacts and implications, or solutions to challenges many merchants may face. Please contact Kelly Andrus if you are interested in learning more about our Collaboration engagement opportunities, including COP participation.

The Merchant Advisory Group

Driving positive change and innovation in the payments industry that serves the merchants interest through collaboration, education, and advocacy.