Charging a fee for a credit card transaction is governed by a layered system of rules, including federal law, specific regulations set by payment card networks, and individual state statutes. The primary fee merchants use to offset processing costs is known as a surcharge. This practice became more common after 2013, when a class action lawsuit allowed merchants in many states to begin implementing these fees. Understanding the legality requires navigating the distinctions between different fee types and the geographic boundaries where they are permitted.
Defining Different Payment Fees
The terminology surrounding payment fees often confuses consumers because different fees have distinct legal and regulatory standards. A surcharge is a percentage-based fee that a merchant specifically adds to a transaction when a customer chooses to pay with a credit card. This fee is meant to recoup the processing costs the merchant incurs, such as interchange and assessment fees. Surcharges cannot be applied to debit or prepaid cards.
In contrast, a cash discount is a reduction in the posted price offered to customers who pay with cash, debit, or another method that costs the merchant less to process. This model uses a single standard price, and the discount is a reduction from that price, not an added fee. This structure is legal nationwide and incentivizes non-credit payments.
A convenience fee is a distinct charge, typically a flat dollar amount, assessed for using a non-standard payment channel, such as online or phone transactions. This fee relates to the cost of maintaining the alternative channel, not the card’s interchange cost. This distinction allows convenience fees to be generally permitted, even in states that restrict surcharging, provided they are clearly disclosed upfront.
The General Rules for Credit Card Surcharging
Where state law permits surcharging, merchants must comply with strict rules set by major payment networks. Vendors must provide advance notice of their intent to surcharge by notifying the relevant card networks and their payment processor at least 30 days before implementation.
The fee amount is strictly capped and cannot exceed the actual cost the merchant pays for processing the transaction. For example, the surcharge cannot exceed 3% for transactions involving one major network and 4% for another. The merchant must always charge the lower of the network cap or their actual processing cost. Furthermore, the surcharge must be clearly disclosed to the customer at the point of entry and again at the point of sale, and it must appear as a separate line item on the final receipt.
State-Specific Restrictions on Surcharging
Individual state laws significantly complicate the legal landscape for surcharging, often overriding general network rules. While many states allow surcharging, a few states and territories maintain outright bans or impose stringent restrictions. Connecticut, Maine, Massachusetts, and Puerto Rico currently prohibit the practice.
Other states have enacted laws that place specific limits on the surcharges or require a high degree of price transparency. For instance, Colorado caps the maximum allowable surcharge at 2%. States like New York, New Jersey, Nevada, and South Dakota require that the surcharge cannot exceed the merchant’s actual cost to process the transaction. California’s laws ban most separate surcharges, requiring the total price to be disclosed upfront. Consumers must be aware of the specific laws in their state, as a fee legal in one jurisdiction may be prohibited in another.
Convenience Fees and Service Fees
Convenience fees are separate from surcharges, as they offset the cost of providing a non-standard payment channel, such as paying a bill online or over the phone. These fees are tied to the payment method or channel, not the card’s interchange cost. Convenience fees must typically be a fixed, flat dollar amount, not a percentage of the transaction. The customer must also have an alternative, standard payment channel available that does not incur the fee. This structure allows businesses to charge convenience fees even in states that ban surcharging. Additionally, convenience fees generally cannot be applied to debit card use in these alternative channels.
What to Do If You Encounter an Illegal Fee
Identifying an illegal fee requires knowing the rules, especially the state-specific restrictions and the network caps. An illegal fee might manifest as a surcharge exceeding the network maximums of 3% or 4%, or a surcharge applied in a state that has explicitly banned the practice. Charging a fee on a debit card or applying a surcharge without clear disclosure at the point of sale also constitutes a violation of the rules.
When encountering a suspicious fee, first address the issue directly with the merchant to request a refund. If the merchant is uncooperative, contact the card issuer to dispute the charge, often referred to as initiating a chargeback. The card issuer will investigate the claim, and federal law allows the consumer to withhold payment for the disputed amount during this process. Finally, if the fee is a clear violation of network rules or state law, the merchant can be reported directly to the relevant card network or the state Attorney General’s office.