Is it Legal Credit Card Fees? As a business owner, you are undoubtedly aware that accepting credit cards is an important part of doing business. So few people carry cash or use checks anymore that a business that does not accept credit or debit cards is likely to lose customers to other businesses that do accept plastic. And it’s not like business owners don’t use credit cards themselves; most small businesses have company credit cards to help manage their own expenses and earn business credit card rewards.
However, opting to accept credit cards for payments costs your business money. With transaction fees as high as 4 percent, you stand to lose as much as $4 for every $100 a customer charges. In a business with a tight profit margin, like a convenience store where most transactions are $10 or less, those fees can add up over the course of a year and take a big bite out of profits.
Many merchants simply accept credit card processing fees as a cost of doing business, and customers are none the wiser as they happily swipe their cards to make their purchases. But a growing number of merchants are unwilling to keep eating credit card processing fees and are looking for ways to pass them on their customers.
Credit Card Fees and the Law
The first question that any business owner needs to consider before charging customers a fee to use their credit cards is whether or not it’s legal.
Credit card fees are subject to various laws and regulations that govern how they can be applied and disclosed to consumers. These laws are designed to protect consumers from unfair or deceptive practices by credit card issuers. Here are some key laws and regulations related to credit card fees:
- Truth in Lending Act (TILA): Enacted in 1968 and implemented by Regulation Z, TILA requires creditors to disclose key terms and conditions of credit transactions, including fees and interest rates, in a clear and consistent manner. Credit card issuers must provide consumers with a written disclosure of the terms of the credit card account before they open an account and must disclose any changes to those terms in a timely manner.
- Credit Card Accountability Responsibility and Disclosure Act (CARD Act): Passed in 2009, the CARD Act includes several provisions aimed at protecting consumers from unfair credit card practices. Among other things, the CARD Act restricts the ability of credit card issuers to raise interest rates on existing balances and imposes limitations on certain fees, such as late fees and over-limit fees. It also requires issuers to provide clearer disclosure of fees and interest rates.
- Regulation Z: Regulation Z, which implements TILA, includes specific requirements for the disclosure of credit card fees and terms. For example, credit card issuers must disclose the annual percentage rate (APR), any annual fees, late payment fees, and other charges associated with the credit card account.
- Electronic Fund Transfer Act (EFTA): The EFTA, also known as Regulation E, governs electronic fund transfers, including those made with debit cards and prepaid cards. While it primarily applies to debit and prepaid cards, it also includes provisions related to electronic payments made with credit cards. For example, it requires issuers to provide consumers with certain protections against unauthorized transactions and errors in billing.
- Fair Credit Billing Act (FCBA): The FCBA provides consumers with certain rights regarding billing disputes on their credit card accounts. Among other things, it allows consumers to dispute billing errors and requires issuers to investigate and correct errors in a timely manner.
- State Laws: In addition to federal laws and regulations, some states have their own laws governing credit card fees and practices. These laws may provide additional protections for consumers or impose additional requirements on credit card issuers.
Further complicating matters is the fact that a merchant’s ability to add a surcharge to credit card purchases is also governed by their individual relationship with the card issuer. Currently, only Visa and MasterCard allow merchants to pass on fees; American Express and Discover prohibit merchants from doing so as part of their terms of service. As a result, merchants have the option of only accepting MasterCard and Visa, since the laws states that surcharges must be applied to all cards, or not charging a fee to anyone.
In addition to restrictions on which cards can be charged a fee, merchants must also comply with other rules. The card issuers must be notified that you will be adding the fees, and customers must be notified by clear signage at checkout or in documented payment terms on contracts before they use their cards. The fee must also be noted as a separate line item on the receipt.
It’s Legal — But Is It the Right Thing to Do?
As noted previously, many merchants understand that they can add a credit card surcharge, but choose not to to keep their customers happy. But sometimes, slim profit margins dictate tough decisions, and passing on fees is a matter of necessity.
Some companies have found a way around the restrictions on credit card surcharges by offering a discount to those customers who pay with cash or debit card. The most common place to see this is at gas stations, where the pump displays a cash price and a credit price. Other businesses have opted to offer a flat discount to cash customers, usually based on their average transaction fee.
Way to Avoid Paying Excess Transaction Fees
However, the most common way to avoid paying excess transaction fees on credit card purchases is to set a minimum purchase amount for credit card purchases. This is legal in every state, and merchants can set a minimum purchase of up to $10 for credit card users. The rule must be clearly posted, but merchants who enforce minimums report that customers generally either choose a different payment type, or buy more to meet the minimum.
It is up to you as the business owner to determine how you want to handle credit card fees. Some argue that it is unethical to charge customers more for using a particular form of payment, but others note that other costs of doing business are passed on to consumers, so why should these fees be any different? At the end of the day, you need to review how much your business is spending on transaction fees, and make the adjustments that you deem necessary to stay afloat.
Ingrid Maldine is a business writer, editor and management consultant with extensive experience writing and consulting for both start-ups and long established companies. She has ten years management and leadership experience gained at BSkyB in London and Viva Travel Guides in Quito, Ecuador, giving her a depth of insight into innovation in international business. With an MBA from the University of Hull and many years of experience running her own business consultancy, Ingrid’s background allows her to connect with a diverse range of clients, including cutting edge technology and web-based start-ups but also multinationals in need of assistance. Ingrid has played a defining role in shaping organizational strategy for a wide range of different organizations, including for-profit, NGOs and charities. Ingrid has also served on the Board of Directors for the South American Explorers Club in Quito, Ecuador.
