By Jeff Fortney, TSG Senior Associate
Surcharging, as defined as an additional cost to buyers of a good or service that want to use a credit card for payment (and as further covered in TSG’s U.S. Surcharging Snapshot Report sponsored by CardX), has been a product offered to merchants by payment processing providers for several years, although it is sometimes marketed under terms like “Cash Discount” or “Non Cash Adjustment.” It has become a topic of conversation throughout the payments industry.
In essence, when a credit card is presented at checkout, a fee of up to 4% is added to the transaction amount to offset processing fees the merchant pays for accepting credit card transactions.
In January, Visa shared a bulletin announcing two significant changes to the credit card surcharge rules that will become effective on April 15, 2023:
- Merchants who intend to surcharge are no longer required to register with Visa. Instead, the merchant must notify their merchant acquirer 30 days in advance of commencing surcharging.
- The maximum allowed surcharge in the US will be reduced to 3% from the current 4% maximum. In Canada the surcharge rate will be reduced to 2.4%.
In addition to these two changes, Visa reminded all that “surcharges are only permitted on credit cards and in US States, US territories, Or Canadian provinces where surcharges are not prohibited by local law.”
The initial change is operational; however, it places the responsibility for handling the surcharge on the acquirer. Visa will require the use of “field 28” for the surcharge amount which will qualify as Visa’s notification of surcharge. They will be monitoring that field across credit card transactions for any violation.
The second change will have an immediate monetary impact on existing merchants and future sales.
If a merchant is currently surcharging 4%, This will have to be reduced to 3% on or before April 15, 2023. If their offsetting processing fee is higher than 3%, solely changing the surcharge will not offset the costs of processing credit cards, as set on their merchant agreement.
In turn, if the cost to the merchant is reduced to 3%, that reduction may be below the cost of processing for the merchant. If the rate assessed to the merchant is not reduced to match the surcharge, the difference will be collected from the merchant.
For example, a merchant with an average monthly processing volume of $40,000 is billed 3.875% for processing credit cards today. After a 4% surcharge is added to transactions, the processing costs to the merchant will be reduced and the merchant will have a monthly cost of $50.00 not covered by the surcharge. If the discount charged to the same merchant is reduced to 3% it may not be sufficient to cover underlying processing fees (Interchange, dues, and assessments).
It is recommended that each merchant be analyzed independently to determine the monetary impact of the reduced surcharge.
It is wise to take heed of the last sentence of the notice: “Visa will continue to monitor the assessment of surcharge and will implement compliance action when violations are identified.” By requiring field 28 to reference the surcharge, the ability to monitor usage is simplified. It should be expected that any surcharge against a debit card ran through the Visa network “rails” will be identified. This will likely lead to potential fines and merchants losing card acceptance ability.
At this time, it is prudent to monitor a surcharging merchant portfolio to confirm that debit cards are not being surcharged.
Even though changes are targeted for April 2023, it is prudent to begin the analysis now. In most cases, any change in discount or in surcharge will require a 30-day notice. It is also wise to confirm card compliance with the rules as set forth by Visa.
Would you like assistance with your surcharging strategy? Contact us today.