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Credit Card Transactions: Convenience & Surcharging

October 01, 2014

Did you know that if you were to divide our total credit card debt among all the households in the United States, you would find that the average American household owes just over $7,000 (NerdWallet)? If you subtract the households that report not owning credit cards from that total, the average debt per household more than doubles. What does that tell us? That at least half of the households in the United States use credit cards—and to a significant degree.

How is that relevant? Well, if your business isn’t currently accepting credit cards, it should be. Because about half or more of your customers probably want to pay that way. And when you put any personal feelings about the growing bubble of American debt aside, your business wants to get paid. Which brings us to the uncomfortable and sometimes confusing topic of CREDIT CARD PROCESSING FEES.

If the last four words of that paragraph got your nerves on end, you’re not alone. I haven’t met anyone who actually enjoys the topic of credit card processing fees. The whole process is complex and confusing and can really add up to some big numbers at the end of the day. However, it’s a topic that most businesses have to face at some point or another.


At whose convenience is it, really?

I find that this is something not a lot of people talk about. Everyone just kind of assumes that credit cards make purchasing more convenient for customers. Which, in a way, is true. It’s certainly handy knowing that when you need groceries a week before you get paid, you still have a way to eat. Plus, you can always pay it off when your check comes in. And it looks good on your credit score, so you can get better loans for houses, cars, etc. So what harm is it really? Unless something else comes up and you have to pay the APR on your purchase several times before you pay it off. Or you somehow miss your payment date. Then you start to get into trouble.

If you step into the shoes of a business, using a credit card for business transactions is swell. Why? Because if you know you have the money to pay it off in a few days, that money can sit in the bank and accrue interest or work as some other form of investment until the bill comes along. Then when it comes to accepting credit cards, a customer who pays by credit card means a simple and quick swipe (or a dip for EMV cards) and a signature. Hey, you can even store that card information (with their expressed permission) and not have to worry as much about getting paid the next time. Whereas a customer who pays by cash or check means a trip to the bank to make a deposit, an employee with their fingers in a cash drawer and the risk of being robbed. Even credit card customers start to look good.

And then later, you get the bills for processing the card and you might find yourself feeling a bit differently. It’s a tricky game. The truth is, there are some major conveniences for both business and personal use cases when it comes to owning and using credit cards. But it can also be a dangerous game to play.


Customer Expectations

Unfortunately, whether you are on board or not, most customers expect to be able to pay by credit card or cash. So you get the best and worst of both worlds. But at the end of the day, it’s vital to understand that some customers simply won’t do business with you without the option of credit cards. In fact, some customers won’t do business with you unless they can either access bills and payments online and use a credit card, or store the credit card information on file for automatic processing.

These expectations are what really make credit card processing such a hot topic for business owners.


Major Players

We are all pretty familiar with the major credit card companies. These are Visa, MasterCard, Discover, and American Express (AMEX). These guys give you the card, charge you the interest on your purchases, and send card holders the bill at the end of the month. But what many individuals and business owners don’t know is that they also help lay down the law on how businesses can recover the costs of credit card processing during transactions (we’ll discuss this later).

Now, there are also two other major players to consider when discussing credit card fees. And these are primarily the concerns of the businesses who want their customers to be able to use credit cards. These two players are the payment gateway and the merchant services accounts that handle the credit card information being transmitted from the card swipe machine through the final withdrawals and deposits in bank accounts.

Merchant accounts allow your business to accept payments from credit cards, debit cards and eChecks (or electronic bank drafts). The merchant account does all the heavy lifting as far as initiating transactions, or the transfer of money, between a business and its customers. When you are accepting payments in person instead of online, in many cases, you can get away with operating directly through a merchant account using their payment terminals and devices.

Payment gateways are primarily required for e-commerce (or the acceptance of payments online through a website). The purpose of a payment gateway is for secure checkout and payments through third party online environments. The payment gateway collects information such as payment amounts, customer names, addresses, credit card or bank account numbers, etc. The payment gateway can also store credit card information and related details on file to initiate future payments. But it does not move any money. It simply verifies and submits all of this information through a secure connection to your merchant account for transactions and settlements to take place.


Identifying the Costs of Credit Card Processing

If you are processing credit cards at your business, your bills are going to come from your merchant account and your payment gateway. In some cases, both accounts may be owned and operated by the same parent company, so your bills may be combined into one.

These bills commonly include some mixture of the following fees:

Annual or Semi-Annual Fee- A fee for maintaining an account.

Monthly Fee- A minimum fee for access to a merchant services or payment gateway account to use for processing to help the company cover costs.

Statement Fee- A monthly fee for providing a statement of the amounts processed and associated fees.

Authorization Fees- A fee incurred each time a request for a transaction is sent through to verify account information (whether or not the transaction is successful).

Transaction Fees- One or more fees applied when a transaction is successfully authorized and initiated. These often vary by type of transaction (card present/not present, eCheck, etc.)

Interchange Fee- A term used in the payment card industry to describe a fee paid between banks for the acceptance of card based transactions. This fee is passed through to merchants and accounts for the majority of your credit card fees.

Batch Fee- Charged for “settling” a merchant terminal, or sending the day’s complete list of transactions to a bank for payments and settling. If batches are not performed within 24 hours of a transaction, higher rates may be assessed to the merchant by the major credit card companies for processing.

Chargeback Fee- A fee incurred by a merchant’s processing bank and passed to the merchant account holder when a cardholder disputes a charge incurred as fraudulent.

Early Termination Fee- For gateway or merchant companies which require time based contracts, this is a fee incurred for cancelling before the stated timeframe on the contract.

Customer Service Fee- Some gateway or merchant companies may require payment for customer service time consumed by the account holder.

Refer to your merchant agreement and/or statements for a full list of fees. These fees could vary quite a bit depending on the merchant processor that you are using.


Covering your Costs

Naturally, when you see these costs begin to add up, as a business owner you start racing for a solution to help cover the costs. Until recently, explicitly charging customers merchant surcharges or checkout fees for credit card transactions was not allowed by the major credit card associations. Some merchants were able to pass on “convenience fees” in very limited circumstances, but for general purpose, it was taboo.

 In 2013, a lawsuit brought against Visa and MasterCard changed these practices. Now, merchants can issue surcharges or checkout fees to customers who pay specifically by credit cards. But the billable amounts and the conditions under which these fees can be passed on to customers are still highly regulated, and not just by the major credit card companies (Advocharge).

State and federal government can also pass laws which prohibit businesses from directly passing on these fees to customers paying by credit card in the interest of the general economy. There is, however, a loophole that many businesses take advantage of when they operate in an area where surcharges are not permitted by law. Instead of charging more for customers who pay by credit card, some businesses provide a discount to customers paying by cash or check (CardFellow).

The penalties for breaking financial laws are severe, and as such, we strongly urge you to discuss the legality of passing on any of these charges with legal counsel before making any decisions.

And remember, legality is not your only concern. When you treat one customer differently than another because of their form of payment, you run the risk of entering into a lot of social and ethical debates with your customer base. You should always take their feelings into consideration. As stated previously, many customers expect to be able to pay by credit card. But quite often, these same customers do not expect an additional fee. It’s easy to lose customers to a competitor over “hidden fees” like surcharges.

As a general rule at iClassPro, our representatives recommend against directly passing on these fees to customers as it complicates your billing process. And due to potential legal issues, we do not have a feature that allows you to tack on said fees automatically. Instead, a small tuition hike across the board can be easier to manage, help you avoid legal hazards and have a smaller impact on customer buying decisions.



Chen, T. (2014, September 1). American Household Credit Card Debt Statistics:2014. Retrieved September 10, 2014, from http://www.nerdwallet.com/blog/credit-card-data/average-credit-card-debt-household/

Dwyer, B. (2013, January 1). Checkout Fees: Charging Credit Card Fees to Customers. Retrieved September 10, 2014, from http://www.cardfellow.com/blog/checkout-fees-charging-credit-card-fees-to-customers/

Advocharge (2013, May 1). Visa/Mastercard Interchange Fee Litigation - Credit Card Surcharge. Retrieved September 10, 2014, from https://advocharge.com/visamastercard-interchange-fee-litigation-credit-card-surcharge/