Businesses often face a double-edged sword when accepting credit cards. Credit card processing comes with fees that can eat into your profits, but defraying the cost with a surcharge for shoppers can turn away business. As a business owner, it’s essential to decide which option makes sense for your business, as a growing number of states now allow companies to offer a cash discount or add a credit card fee for electronic payments.

Research suggests that while surcharges can help offset costs, they may impact customer satisfaction in some cases. It seems likely that cash discounts are viewed more positively by consumers. Evidence suggests that careful implementation is crucial to maintain loyalty, especially in competitive markets. Here’s a look at the pros and cons of defraying your costs, when legal.

What Are Credit Card Processing Fees?

Credit card processing fees are charges that merchants pay to accept card payments. These fees fund the ecosystem that involves issuing banks, card networks (such as Visa and Mastercard), and payment processors.

In 2025, average fees range from 1.5% to 3.5% per transaction, depending on factors such as card type (rewards cards incur higher costs), transaction method (in-person vs. online), and business volume. For example, a $100 sale might incur $2.50 in fees.

Components of Fees

When a business accepts card payments, the total cost is made up of several components, each serving a different party in the payment ecosystem. The most significant portion is interchange fees, which go to the card-issuing bank. These typically range from 1.5% to 3% of the transaction amount, plus approximately $0.10 per transaction. Interchange rates vary depending on the type of card used (credit vs. debit, rewards vs. standard) and whether the card was present in the transaction.

Next are assessment fees, which are relatively small but unavoidable charges from the card networks (e.g., Visa, Mastercard). These average around 0.13%–0.15% of the transaction value and are standardized across all processors.

The final layer is the processor markup, which is the charge your payment processor or merchant service provider applies to facilitate the transaction. This markup often runs between 0.2%–0.5% plus $0.10, though it can be negotiable—especially for merchants with significant sales volumes.

High-volume businesses often benefit from interchange-plus pricing, where each component is broken out and open to negotiation. Smaller companies, however, are usually offered flat-rate pricing models, which simplify billing but may ultimately prove more expensive overall. Understanding these fee structures is key to managing payment costs effectively.

Transaction Type	Average Fee Range
In-Person Debit	1.5%-2.0%
In-Person Credit	2.0%-2.9%
Online Credit	2.5%-3.5%
Rewards Card	3.0%-3.5%

Can You Add a Fee for a Card Payment?

Before you even consider adding a fee for shoppers who pay with a credit card, make sure you are allowed to do so. As of 2025, only four jurisdictions forbid surcharges outright: Connecticut, Maine, Massachusetts, and Puerto Rico. This represents a significant shift from 2018, when nine states prohibited them; legal challenges and court rulings have since overturned bans in places like Florida, Kansas, Oklahoma, and Texas. For example, Florida’s ban was deemed unenforceable by federal courts.

Even if your state allows it, you will likely want to be careful of restrictions and regulations. Many states cap surcharges at the merchant’s processing cost or a percentage (e.g., Colorado, 2%; Montana, 3%). Card networks also impose rules: Visa caps transactions at 3%, while Mastercard caps them at 4%. Additionally, surcharges must be disclosed clearly. In general, it’s always advised to place signs warning customers of the charge, especially near your credit card machine. The sign should be legible and clearly display the amount of the charge and the period during which it applies. For online or phone sales, disclose verbally or in text.

Category	States	Key Rules
Prohibited	Connecticut, Maine, Massachusetts, Puerto Rico	No surcharges allowed.
Restricted	Colorado (2% cap), New York (not exceed cost), New Jersey (not exceed cost), Nevada (not exceed cost), South Dakota (up to 4% or cost), Illinois (1% cap), Montana (3% cap), Minnesota (avoidable, changes Jan 2025), California (disclosure-heavy under SB478), Florida (unenforceable ban, follow federal), Oklahoma (unenforceable), Texas (convenience fees ok), etc.	Must disclose; caps apply.
Fully Allowed	Alabama, Alaska, Arizona, Arkansas, Delaware, Hawaii, Idaho, Indiana, Iowa, Kentucky, Louisiana, Maryland, Mississippi, Missouri, Nebraska, New Hampshire, New Mexico, North Carolina, North Dakota, Ohio, Oregon, Pennsylvania, Rhode Island, South Carolina, Tennessee, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin, Wyoming	Follow card network rules: up to 4%, disclosure required.

Always consult a legal expert or your processor for compliance, as penalties can reach $500-$25,000 per violation.

Understanding Your Options

Options like surcharges, cash discounts, and convenience fees each have nuances. Surcharges pass fees directly, while cash discounts incentivize the use of non-card payments. Consider your industry and customer base before choosing.

• Surcharging: Adding a fee directly to card transactions allows you to pass processing costs entirely to customers. While this protects your margins, it may deter some buyers and is subject to regulation in certain regions.
• Cash Discount: Offering a lower price for cash or non-card payments encourages customers to avoid card use. This approach is often viewed positively but requires careful pricing adjustments and clear communication.
• Pay Fees Yourself: Absorbing the fees as part of your business costs ensures a smooth customer experience and maintains goodwill. However, this reduces your profit margins and can add up quickly for businesses with high volumes or low margins.

Reasons to Avoid Surcharging Customers

The biggest drawback of surcharging is its potential to damage public perception of your business. Many shoppers dislike seeing an extra fee added at checkout, and some may even switch to competitors who don’t surcharge. A survey by creditcards.com showed that most consumers claim they are unwilling to pay a fee to use their credit card, though actual behavior may differ. Some customers may initially resist, but they will later adapt to the surcharge or opt for alternative payment methods. However, data from the 2025 J.D. Power study reinforces this concern: customer satisfaction scores dropped by 39 points when surcharges were applied, and 65% of respondents reported experiencing them.

For businesses with high debit card usage, surcharging is even less effective. Since surcharges apply only to credit cards, the recovered costs cover only a fraction of total transactions, while still risking reputation loss and customer frustration. Department stores and online retailers tend to process a higher volume of credit transactions, making surcharging more relevant. In contrast, gas stations and discount stores typically see higher debit card use, where surcharges offer little benefit.

Common drawbacks include customer loss (71% switch to cash or debit, which can be mitigated by offering alternatives), reputation concerns (87% feel “nickel-and-dimed,” which can be reduced through transparent communication), and accounting complexity (manual tracking is required, but compliant software can help).

What About a Cash Discount?

Another option is to price your merchandise as if shoppers will pay by credit and offer a cash discount. This option can have the same advantages as surcharging without negative opinions. After all, shoppers will be less averse to receiving a discount if they choose to pay cash rather than pay a fee to cover your payment processing costs. In practice, discounts of 3-4% encourage cash use, and they’re legal nationwide, including in states where surcharging is prohibited.

Surcharging vs. Convenience Fees

When evaluating strategies to manage card processing costs, it’s important to distinguish between surcharges and convenience fees, as the rules, applications, and customer impact differ.

Surcharges are fees explicitly added to credit card transactions to offset processing costs. They are capped at 3-4%, depending on card network rules, and are subject to strict regulations in certain states. Surcharges cannot be applied to debit or prepaid cards, and businesses must provide clear disclosures to remain compliant. While surcharging helps recover costs, it risks frustrating customers who feel penalized for using credit.

Convenience fees, on the other hand, apply to any card type or payment method, but only in specific circumstances. They are typically charged when a customer uses a “non-standard” payment channel, such as online, by phone, or through a mobile app, rather than in person. Unlike surcharges, convenience fees often take the form of a flat fee (e.g., $2.50) but may also be percentage-based depending on the provider. States like Texas favor convenience fees over surcharges, making them legally safer in some markets.

Pros include greater flexibility and broader legal acceptance. Cons include the requirement always to offer a fee-free payment alternative to avoid alienating customers.

How to Implement Surcharging Compliantly

Implementing surcharging can help recover credit card processing costs, but it must be handled carefully to avoid fines and damage to reputation. Compliance requires attention to both card network rules and customer transparency. Below are the key steps explained in detail:

• Notify Your Processor: Most major card networks (Visa and Mastercard) require you to inform both your acquiring bank and your payment processor at least 30 days before implementing a surcharge. This gives them time to update records and ensure compliance. Discover and American Express do not have this requirement, but confirming with your provider is always best practice.
• Disclose Clearly: Transparency is non-negotiable. You must display clear signage at the entrance and point of sale, in at least 32-point font, stating that credit card transactions will include a surcharge. Additionally, every receipt must list the surcharge as a separate line item, so customers understand exactly what they are paying for. Hidden fees can lead to disputes, chargebacks, and fines.
• Set Up Technology: Use payment gateways or POS systems that automatically identify the card type. This ensures surcharges are only applied to eligible credit cards and not to debit or prepaid cards, where surcharging is prohibited. Automated systems reduce the risk of human error and help maintain compliance.
• Train Your Staff: Employees should be fully briefed on the surcharge policy. This includes knowing how to explain it to customers in a professional and reassuring manner. Training prevents awkward interactions at checkout and ensures customers understand the rationale behind the fee.
• Monitor Compliance: Compliance doesn’t end after implementation. Regular audits and updates are essential to stay current with card network changes and evolving state laws. Non-compliance can lead to fines of up to $25,000, as well as potential suspension of processing privileges. Utilizing compliance software and maintaining regular contact with your processor helps minimize these risks.

Industry-Specific Considerations

Payment strategies like surcharging, convenience fees, and cash discounts don’t work the same way across all industries. Customer payment habits, transaction sizes, and competitive pressures shape which approach is most effective.

Understanding these differences helps businesses select a cost-recovery model that minimizes fees without compromising customer trust.

Retail and Online Businesses

In retail and e-commerce, credit card usage tends to dominate over debit, making surcharging a more viable option for recovering processing costs. However, these industries are also highly competitive, where customer experience has a direct impact on sales. Online shoppers in particular are prone to cart abandonment when unexpected fees appear at checkout.

Even small surcharges can trigger adverse reactions, as customers can easily switch to competitors offering “no extra fee” experiences. To minimize the risk, businesses should disclose surcharges early in the purchasing process, provide apparent alternatives such as ACH or PayPal, and consider offering loyalty incentives to offset any negative perceptions.

Gas Stations

Gas stations typically experience higher debit card usage, making surcharging less effective because it can only be applied to credit transactions. For this industry, cash discount programs are usually a better fit. Customers are accustomed to seeing dual pricing—“cash” vs. “credit”—on fuel signage, which makes discounts more acceptable and easier to communicate.

By promoting cash payments, stations can reduce processing costs without alienating their debit-heavy customer base. Since fuel margins are already thin, a well-structured cash discount program can deliver significant savings while maintaining competitive pricing. Compliance with signage requirements remains critical in this model.

Professional Services

Industries such as legal, healthcare, consulting, or education often collect payments via invoices rather than in-person transactions. For these businesses, convenience fees are a more effective tool than surcharges. They allow providers to pass on costs when customers pay online, by phone, or through other non-standard channels, while still offering fee-free alternatives, such as checks or ACH transfers.

Because professional services often deal with larger transaction amounts, even modest fees can recoup significant costs. However, clear communication is essential: positioning the fee as covering the “convenience” of using credit helps reduce resistance and maintains a professional relationship with clients.

Small Businesses

For small businesses, absorbing card processing fees can eat into already thin margins, making surcharging particularly attractive. Studies show that around 33% of small businesses apply surcharges, especially in sectors where competition is less price-sensitive. By passing costs on to customers, small merchants can protect their profitability and reinvest the savings into growth.

However, loyalty risks must be monitored closely—longtime customers may perceive surcharges negatively and seek alternatives. Transparency and customer education are key. Pairing surcharges with loyalty programs, cash discounts, or bundled offers can help mitigate the impact and preserve goodwill while offsetting payment processing expenses.

Tax Implications

Surcharges are generally not considered taxable revenue in the same way as fees or income, but they must still be accounted for separately and with care. While the IRS doesn’t treat surcharges as income for tax purposes, businesses should maintain clear records to differentiate them from sales revenue when filing. However, state-level regulations may differ; several jurisdictions, including Washington and California, require that surcharges be included in the total taxable amount.

Any surcharge added must be included in the “selling price” and is subject to retail sales tax under the same category as the underlying good or service. This means that while surcharges help offset processing costs, they can inadvertently increase your tax liability if not handled properly. Always consult IRS guidance along with your state’s tax regulations, or consider working with a tax professional to ensure accurate and compliant reporting.

Alternatives to Surcharging

While surcharging can help recover card processing costs, it isn’t always the best fit for every business or customer base. Fortunately, as we have discussed before, several alternatives allow merchants to manage expenses while maintaining a positive customer experience.

• Negotiate Fees: One of the most effective ways to lower costs is by negotiating directly with your payment processor. Different providers have different markups, and high-volume businesses often have the leverage to secure lower rates. Even small reductions in interchange-plus pricing or processor markups can translate into significant annual savings.
• Encourage ACH: Promoting ACH (Automated Clearing House) transfers is another cost-efficient option. These bank-to-bank payments typically carry much lower fees than card transactions. For businesses handling recurring or large payments—such as service providers, landlords, or B2B companies—ACH can significantly reduce processing costs while still offering customers a convenient digital option.
• Dual Pricing: Listing both cash and card prices promotes transparency, allowing customers to choose their preferred payment method. This model, commonly used in fuel and convenience retail, encourages cash use without penalizing cardholders directly. It can reduce card usage over time and protect margins while maintaining customer trust.
• Absorb Costs: Some businesses choose to simplify the checkout experience by building processing costs into their overall pricing. This approach avoids customer resistance and keeps transactions seamless, especially in competitive markets where hidden fees might drive buyers away. While it reduces margin per transaction, it can strengthen customer loyalty and streamline operations.

Choosing a Merchant Processor

Selecting the right merchant processor is one of the most critical decisions for managing payment costs and compliance. Beyond low rates, businesses should consider transparency, technology, and support for surcharging or alternative pricing models.

• Transparent Pricing: Processors should clearly separate interchange fees, assessments, and markups so you know exactly what you’re paying for. Avoid providers that only offer flat rates without transparency, as this often results in higher costs over time.
• Compliance Tools: Since surcharging and fee structures are subject to strict network and state rules, choose a processor that provides built-in compliance safeguards—such as automated card detection, receipt formatting, and state-by-state rule guidance.
• Surcharge Support: Not all processors allow surcharging, so if this strategy is central to your business, ensure the provider explicitly supports it. Some even specialize in surcharge-friendly solutions.

Top 5 Merchant Processor Picks

1. Stripe

Stripe is highly flexible and developer-friendly, making it a top choice for online and subscription-based businesses. It offers powerful APIs, integrations with e-commerce platforms, and advanced fraud detection tools.

Stripe’s transparent pricing ensures you know exactly what you’re paying, and its ability to scale globally makes it ideal for fast-growing digital-first companies.

2. Square

Square is known for its simplicity and accessibility, making it particularly attractive for small businesses, retail shops, and restaurants.

It provides flat-rate pricing, easy-to-use hardware, and no long-term contracts. Square also bundles inventory management, invoicing, and payroll tools, providing small merchants with an all-in-one solution that eliminates the need for complex setup or negotiation.

3. Stax

Stax focuses on interchange-plus pricing and is one of the few processors that openly supports surcharge programs. This makes it especially appealing to high-volume merchants looking to offset credit card fees without hiding costs.

Stax charges a monthly membership instead of transaction markups, which can deliver substantial savings for businesses processing larger amounts.

4. PayPal

PayPal remains a leader in online and peer-to-peer transactions, offering instant brand recognition and customer trust. It’s powerful for e-commerce, marketplaces, and freelancers who need quick setup and seamless integration with websites or apps.

While fees can be higher than some competitors, PayPal’s global reach and built-in buyer protection are unmatched advantages.

5. Fiserv (Clover)

Fiserv’s Clover platform is a robust option for established retailers and restaurants that need both in-person and online processing. It offers a wide range of POS hardware, inventory systems, and employee management tools.

Clover supports flexible pricing models and surcharge features, making it an ideal solution for businesses that require scalability with enterprise-grade reliability.

Conclusion

Managing credit card processing fees is a balancing act between protecting margins and maintaining customer satisfaction. Surcharging, cash discounts, and convenience fees all have their place, but the right choice depends on your industry, transaction volume, and customer expectations. While surcharges can offset costs, they must be implemented carefully to avoid reputational risks and compliance penalties.

Many businesses find that negotiating better rates, encouraging alternative payment methods, or adopting dual pricing can provide a smoother path to success. Ultimately, success comes from staying transparent, compliant, and customer-focused while choosing the solution that best aligns with long-term growth.

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