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Credit Card Surcharging to be Legalized in Colorado

Colorado recently passed a law making credit card surcharging legal in the state, taking effect July 1, 2022.

Colorado was one of the last hold-outs for bans on surcharging, leaving Massachusetts and Connecticut as the only two states with bans still in place.

Surcharging has been gaining ground over the last several years as states continue to lose legal battles brought forth by merchants fighting these bans.

While this continues a trend of victories for companies that accept credit cards as a form of payment, many businesses will nevertheless refrain from implementing a surcharge program…and for good reason.

Surcharging is a complicated matter, with inherent risks. Even in states where it is legal, there are sometimes laws governing when and how it can be done. And the card brands (Visa, Mastercard, etc.) have their own rules and penalties in place, when it comes to surcharging.

Here’s what you need to know:

Every time a business takes a credit card payment from a customer or client, that business pays a set of processing fees to the banks and the payment processors involved in the transaction.

Processing fees, on average, range from 2% to 4% of the transaction total.

Surcharging means: the business charges the customer for all or a portion of that cost, and should appear as an additional expense line-item on the receipt.

Surcharging differs from cash discounts, convenience fees, service fees, etc.

With credit card surcharging, the customer is paying MORE than the listed price, whenever using a credit card.

Cash discounts differ, in that the listed price is what the customer pays when using a credit card…but a discount is offered if the customer elects to pay by cash instead. Cash discounts are not restricted by the rules that govern surcharging.

A convenience or a service fee is a type of surcharge, but not related specifically to the use of a credit card. These add-on fees are more often related to the payment channel: online, vs. over the phone, vs. in-person. They are not considered credit card surcharges as long as the customer has some method available for paying by credit card without the surcharge taking place. An example would be: paying online by credit card may result in a convenience fee–whereas paying with the same credit card in-person would not.

While the rules vary depending on a number of factors, including the geographic location in which the transaction takes place (this gets more complicated with ecommerce), here are the most common restrictions:

  • The surcharge cannot be greater than the processing fees paid by the merchant
  • The surcharge cannot be greater than 4% of the transaction total
  • The surcharge must be listed on the receipt and must be calculated PRIOR to sales tax
  • Signage indicating the surcharging policy must be present, clear, and visible at the point-of-sale
  • Debit cards and prepaid cards cannot be surcharged
  • Visa and Mastercard must be notified 30 days in advance before a surcharging process can be implemented
  • Surcharging must be consistent across all card brands
  • A refunded transaction must include all or part of the surcharged amount
  • Surcharges cannot be assessed alongside convenience/service fees related to the same transaction

Adding to this complexity, some states that have legalized surcharging have their own distinct rules in place. Colorado’s new law, for instance, restricts the surcharge to either 2% of the transaction total, or an amount equivalent to the fees paid by the merchant, without a cap. This conflicts with the 4% cap put in place by Visa and Mastercard, in cases where the processing fees are higher than 4% … and this conflict has yet to be tested. 

Whatever the case, if these rules are broken, there are penalties. These too will vary based on the rules that are in place for any given merchant. But they can be steep. 

Mastercard, for instance, may fine a merchant $20,000 for a first offense. And it’s quite possible that a business’s merchant account could be suspended entirely, if the violation is not rectified.

The takeaway is this: if a business chooses to implement a credit card surcharging program, that business should consult with legal counsel before doing so, in order to best navigate any applicable laws, regulations, or card brand rules that may apply.

Every business should consider the above risk factors–and consult with legal counsel–before pursuing a credit card surcharging policy.

It is also important to consider the risk to client relationships. 

While surcharging can increase profitability by offsetting a significant expense, it can also put some businesses in an uncompetitive situation. 

By definition, surcharging is a price increase that some clients might view negatively, causing them to do business elsewhere.

Even cash discounts can be viewed in a negative light, and dilute the value of a business or consumer offering.

To properly implement a surcharging policy, it is critical that a business:

  • Follow the rules exactly
  • Calculate the surcharge accurately
  • Maintain positive customer relations in spite of the policy

Again, this is incredibly complicated to do. And the rules change often.

As always, consult with legal counsel before proceeding.

Ultimately, credit card surcharging might not be a good fit for every business–especially those that are in a highly competitive industry, or do not have staff bandwidth or expertise to manage the nuances.

If credit card surcharging is not a good fit for your business, there are other ways to offset or reduce credit card processing fees.

The most effective approach is to eliminate account setup errors, apply industry benchmark rates, and optimize the discount fees. This can be complicated too, but is free from risk and can be outsourced easily.

To help identify errors and overcharging on your merchant account, contact Verisave for a processing fee analysis. This is done at no charge.

Verisave is a third-party cost-reduction firm specializing in merchant accounts and credit card processing fees.

Verisave is not a payment processor, and is not affiliated with any processors, card brands, or banks.

Verisave has more than 20 years of experience optimizing and monitoring the credit card processing industry.

Contact Verisave

Infographic: Credit Card Processing Fees

Where Do Your Fees Go?

When a merchant takes a credit card payment, a portion of that sale is taken in the form of merchant account fees ...

Every merchant must have a relationship with a credit card processor in order to take credit card payments.

But the processor is ONLY keeping about 5% of the fees a merchant pays.

Thus, negotiating with the processor (or switching to a new processor) is NOT the best way to reduce credit card processing fees.

Most of the savings we achieve for our clients actually come from the issuing bank …

How it Works

1. Upload Your Merchant Account Details

Send copies of your merchant statements to Verisave.

2. Review Your Free Savings Analysis

Verisave will provide you with a detailed Savings Analysis.

3. Let Verisave Implement Strategies to Save Money

Verisave will implement the savings for you.

Visa and Mastercard are Changing the Rules

Twice-Yearly Changes to Credit Card Processing Fee Structures Often Catch Merchants Off-Guard

Here's an overview of the changes put in place in April, 2019. Including one that can significantly increase a merchant's Interchange Fees ...

The April 2019 Changes:

Visa and Mastercard change the rules governing merchant processing fees twice per year: April and October.

At each interval, they enact numerous changes … most of which cause fee increases for merchants.

One recent change from Mastercard caused a tremendous increase in Interchange Fees on some transactions. This change takes even more money from the merchant, and puts it into the pocket of the bank that issued the credit card to their customer.

The full scope of the April 2019 change interval is characteristically complex. One fairly thorough overview can be found HERE.

Verisave is always happy to advise clients on these changes, and how they may affect their merchant accounts.

An Example from a Verisave Client:

Some of our clients process a large volume in exactly the classification of transaction that was hit hardest by this change. Fortunately, there are often other solutions that can be developed, bringing a comparable savings back in to the picture.

Here’s one example:

  • Client takes a large volume of Mastercard payments
  • The April 2019 Mastercard changes increased the Interchange
  • The impact was likely to be $1.2 million in additional fees for this client
  • Verisave was able to bring a solution that offset the additional fees by about $800k

Request a Mastercard Impact Analysis

Our team will review your merchant account and determine if the latest Mastercard change is having a negative impact on your Interchange Fees.

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Benchmarking Your Credit Card Processing Fees