Transaction Fees: Credit Card Surcharging and Minimum Transaction Amounts

By: Lance Sacknoff

Various practices adopted by many small business owners meant to alleviate the hardships imposed by transaction fees, such as creating a “minimum credit card payment” policy, have become commonplace in small business storefronts across the country.

While a number of these practices may seem innocent enough, federal and several states’ laws regulate or prohibit outright some of these practices, such as assessing convenience fees for credit card use. To avoid the possibility of future private litigation, fines, or even criminal punishment, savvy business owners should make learning about the permissibility of these practices.

transaction fees and practices offsetting costs

To start accepting credit and debit cards as a form of payment, merchants have to enter into a contract between the merchant and the various credit card issuers: the four biggest issuers of credit and debit cards being Visa, MasterCard, Discover, and American Express. The card issuers often refer to these contracts between card issuers and merchants as a “Merchant Agreement.” The Merchant Agreement will contain, among many other provisions, a number of rules and regulations that a merchant must observe when accepting a credit card as a consumer’s payment for goods sold or services rendered. If the merchant does not follow these regulations, the card issuer can punish the merchant in a number of ways, such as by no longer allowing the merchant to accept Visa credit or debit cards as a form of payment.

Although credit card issuers have developed a number of rules that explicitly address (and sometimes outright prohibit) practices for reducing merchant costs for processing credit card transactions, small business owners’ attempts to reduce these costs are understandable. The average card issuer processing fees vary from 1.3% to 3.5% per transaction, depending upon the brand (or “card network”), the type of merchant, and the type of credit card used.

PAYMENT NETWORK	AVG. PROCESSING FEES
Visa	Between 1.29% + $.05 to 2.54% + $.10
Mastercard	Between 1.29% + $.05 to 2.64% + $.10
Discover	Between 1.48% + $.05 to 2.53% + $.10
American Express	Between 1.58% + $.10 to 3.45% + $.10

Table data via The Ascent

defining common practices

The Minimum Transaction Amount and Card Surcharging are the two most common practices that could lead a merchant to run afoul of credit card issuer rules. Understanding what these practices entail constitutes the first step in avoiding them or only using them when the law permits:

1. 1. 1. A minimum transaction amount is the lowest transaction value that a merchant allows for a customer to pay with a card. If a merchant posts a sign that says, “$10 minimum for credit cards,” then a customer trying to purchase a $5 sandwich would have to pay with cash.
      2. Card surcharging occurs when a merchant adds a fee to a customer’s bill when the customer elects to pay with a card. These fees have several names, such as “convenience fee,” “transaction fee,” or “processing charge.” If a customer elects to use a card when buying a $1.50 stick of gum, a merchant surcharges the customer by adding a convenience fee of 20 cents to the bill.

permissibility of minimum transaction amounts and surcharging

After the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010 and subsequent legislation, credit card issuers are no longer allowed to explicitly prohibit any sort of minimum transaction amount. A subsequent 2016 legal settlement to a class action lawsuit brought against the issuers led to uniformity among the issuers in their policies on surcharging and minimum transaction amounts.

minimum transaction amounts permissible but limited

Although no state or federal law prohibits the use of minimum transaction amounts for credit card transactions, issuers have developed uniform rules for the industry to make policies more fair to consumers and merchants alike:

1. 1. 1. Merchants may set a Minimum Transaction Amount of no more than $10 for any given transaction.
      2. When a merchant sets a minimum transaction amount, they must, typically, provide written notification to the issuer thirty days in advance of instituting the minimum transaction amount.

credit card surcharging permissible but severely

According to the federal Truth in Lending Act (also called “Regulation Z” by the Consumer Financial Protection Bureau), surcharging credit card customers is, strictly speaking, allowed, depending on the state in which the merchant is located.

Sixteen states have statutes that either (1) prohibit credit and debit card use surcharges or (2) encourage merchants to offer discounts for cash transactions to offset processing fees: California, Colorado, Connecticut, Florida, Georgia, Kansas, Maine, Maryland, Minnesota, Nevada, New York, Oklahoma, Texas, Washington, Wisconsin, and Wyoming.

Even if you do not live in a state with a credit card surcharge law, other state laws could address the surcharging practice. For example, Pennsylvania state law does not include a specific prohibition against credit card surcharges. However, a lack of a clear prohibition against levying such surcharges does not mean a Commonwealth court could never deem credit card transaction surcharges as illegal under other consumer protection laws, such as the Commonwealth’s Unfair Trade Practices and Consumer Protection Law (UTPCPL).

The UTPCPL prohibits a number of “unfair or deceptive acts or practices,” including any practices that may create confusion or a misunderstanding. A business that assesses a surcharge to credit cards but not debit cards–despite the two cards looking nearly identical–could constitute an “unfair practice” under the UTPCPL.

Because these statutes vary in their complexity for prohibitions against credit card surcharging, the best course of action would be to avoid the practice entirely and embrace another practice made explicitly legal by the Truth in Lending Act: Cash Discounting.

cash discounting: a viable alternative

Federal agencies, such as the FTC and CFPB have regularly recognized “cash discounting” as permissible under federal law. Although it may seem a matter of semantics, the situation can best be defined as offering a reward, or discount, for cash paying customers rather than a punishment, or fee, for customers paying with credit cards.

The solution might seem overly simple, but sometimes solutions to sticky legal situations can be. Gas stations offering discounts to cash paying customers have been interpreted as a legal practice for several decades:

“Due to unique open air nature of gasoline service stations, dealer wishing to offer discounts for purchase of gasoline by cash may indicate availability of such discount by sign anywhere on premises which is clearly visible to any customer entering service station area; credit card price clearly disclosed on pump is ‘regular price.’” – Board of Governors of Federal Reserve System Official Staff Interpretation FC-0140

A savvy entrepreneur would integrate this solution for their future business practices. Instead of worry about state and federal statutes, simply ring up the items at a price that would be feasible for business profitability if every customer was using a credit card. In the event the customer uses a debit card or cash, apply a discount. If the customer uses a credit card, don’t. It’s that easy.

This post has been reproduced with the author’s permission. It was originally authored on February 11, 2022, and can be found here.