Charging a Credit Card Convenience Fee on Transactions
A recent settlement has changed the rules regarding surcharges, and in many cases merchants are now permitted to surcharge credit card transactions. Please click through to CardFellow to learn the latest regarding convenience fees and surcharging.
Before we get into the topic of what a convenience fee is and whether or not it's something you can use, it's important to understand that a convenience fee is not to be used as a method of passing credit card processing charges to customers. As we'll explain later, a convenience fee may only be charged for a bona fide convenience for providing a payment method outside of a merchant's normal business practice.
If you're looking to explore options for passing processing fees to customers, you should read "Charging Customers a Fee to Pay with a Credit Card" and "Can a pass fees to customers by charging them to pay with a credit card?" in the Merchant Account Operation section of our Merchant Account FAQ / Knowledgebase.
Now that we have the formalities out of the way, let's explore convenience fees as they apply to merchant accounts and credit card processing.
What is a convenience fee?
The definition of a convenience fee varies slightly from one card brand to the next, but it's basically a charge in addition to the original transaction amount for the convenience of being able to use an alternate payment method. It sounds like the same things as a surcharge, but it's not that easy.
By VISA's guidelines, surcharges are different than convenience fees. By MasterCard's definition "any fee charged in connection with a Transaction that is not charged if another payment method is used" is a surcharge. So technically, VISA says that convenience fees and surcharges are different and MasterCard says they're the same thing. Are you confused yet? Don't worry, we'll explain in more depth later on.
Surcharging customers for paying with a credit card is considered discrimination based on payment type. A convenience fee is a charge for offering customers another payment option that is separate and in addition to standard payment methods.
For example, a retail store that takes credit cards, cash and checks as payment can't charge a convenience fee on credit card transactions. This would be considered payment method discrimination because credit card payments are not offered as a bona fide convenience and the fee isn't applied to all methods of payment.
On the other hand, a utility company that primarily accepts payment via mail could charge a convenience fee on in-person credit card payments that they offer as a bona fide convenience to customers.
Can I charge a convenience fee, and if so, under what circumstances?
Different card brands have different rules on convenience fees, but VISA provides the most thorough guidelines.
(source: Card Acceptance and Chargeback Management Guidelines for VISA Merchants)
For merchant who offer an alternative payment channel (i.e., mail, telephone, or e-commerce) for customers to pay for goods or services, a convenience fee may be added to the transaction amount. If the merchant chooses to asses a convenience fee to its customers, the merchant must adhere to the following rules:
- The fee is being charged for a bona fide convenience of using an alternate payment channel outside of the merchant's normal business practice
- The Fee:
- Must be disclosed to customers as a charge for alternate payment channel convenience
- Is applied only to non face-to-face transactions (There is an exception - Please see Visa Tax Payment Program)
- Must be a flat or fixed amount regardless of the amount of payment due
- Is included as part of the total transaction
- Cannot be added to recurring transactions
- Is assessed by the merchant that provides goods and services to the cardholder and not by a third party
- The customer must be given the opportunity to cancel prior to the completion of the transaction
If you do fall into the business category that can charge a convenience fee on VISA transactions, you'll notice that in addition to the other rules, the fee must be a flat rate regardless of the order total. This differs slightly form MasterCard's rules.
Visa Tax Payment Program
Visa has a special program for merchants that are certified by their acquiring organization to participate in the Visa Tax Payment Program. According to the Visa Tax Payment Program Guide:
"The Visa Tax Payment Program allows participating merchants to assess cardholder fees on approved tax types. The program allows a fixed convenience fee - not to exceed $3.95 - for Visa consumer debit products and a variable service fee solution for Visa consumer credit and commercial products. The program also offers an incentive interchange rate to participants on consumer debit tax payments."
Please reference the VISA U.S.A Inc. Operating Regulations available from Visa's Web site or contact your acquiring organization or merchant service provider for more information about the Visa Tax Payment Program.
(Source: "MasterCard Rules" Section "5.9.2 Charges to Cardholders")
MasterCard doesn't go into as much detail about convenience fees as VISA. They simply state that:
A Merchant must not directly or indirectly require any Cardholder to pay a surcharge or any part of any Merchant discount or any contemporaneous finance charge in connection with a Transaction. A Merchant may provide a discount to its customers for cash payments. A Merchant is permitted to charge a fee (such as a bona fide commission, postage, expedited service or convenience fees, and the like) if the fee is imposed on all like transactions regardless of the form of payment used, or as the Corporation has expressly permitted in writing. For purposes of this Rule:
- A surcharge is any fee charged in connection with a Transaction that is not charged if another payment method is used.
- The Merchant discount fee is any fee a Merchant pays to an Acquirer so that the Acquirer will acquire the Transactions of the Merchant.
While the rules for applying a convenience fee are in line with VISA, MasterCard allows a flat, tiered or percentage-based fee structure.
As a result of a Tyler's comment below from December 30, 2009, we looked into MasterCard's convenience fee guidelines surrounding educational and government/municipal merchants. Jim Reed, MasterCard's Vice President of Public Sector Acceptance who developed and manages this program was very quick to respond to our inquiry to confirm that this program is still active.
At the time of this writing the document, "The MasterCard Convenience Fee Program" (document reference #7-125889 Dated: 12/07) is being used to brief merchants about this program. We've linked to this document here at MerchantCouncil.org for your convenience. However, MasterCard may change these guidelines in the future. Please be sure reference MasterCard's website the most current documentation.
(Source: "Discover Operating Manual", Section: "2.3 Surcharges")
Discover doesn't specifically give mention to convenience fees, but they do cover surcharges. For Discover, the two terms are interchangeable.
You may assess a surcharge on a Card Sale conducted using a Credit Card provided that (i) the amount of the surcharge may not exceed the Merchant Fee payable by you to us for the Card Sale, and (ii) you assess surcharges on card sales conducted using other credit cards accepted by you. You may not assess a surcharge or other penalty fee of any kind on any other type of Card Transaction or for any Card Sale conducted using a Card other than a Credit Card.
Discover states that "you assess surcharges on card sales conducted using other credit cards accepted by you." With this Discover has effectively deferred to other card brands for rules governing surcharges. Therefore, to surcharge Discover you'll also have to surcharge the other card brands that you accept - which will bring you back to VISA's more strict guidelines that differentiate between convenience fees and surcharges.
(Source: "American Express Operating Procedures for US Merchants" section: "1.7 Prohibited Use of the Card" and "8.5 Apartment Rentals")
American Express has a bit of confusion regarding surcharge in their operating agreement.
AMEX doesn't specifically mention surcharges in the "Prohibited Use of the Card" section of their operating procedures but they make specific reference to this section from the "Apartment Rentals" section of the same guide stating that:
"The prohibition in subsection 1.7 "Accepting the Card – Prohibited Uses of the Card" against imposing restrictions, conditions, or disadvantages (e.g., fees, surcharges, "convenience" or "administrative" fees, penalties) when the Card is accepted will apply whether or not your Rental Establishments impose them on any Other Payment Products."
There actually is no reference in subsection 1.7 that mentions surcharging, but it's obviously implied. In light of this, it's apparent that American Express also generally rules against convenience fees. If you'd like to make sure, we suggest that you contact AMEX directly, reference your merchant identification and request their convenience fee policy for your business's situation.
On September 14, 2009 Cara said:Can a contractor who has several divisions (let's use a landscaper for example) charge a convenience fee on one particular service? For example: This landscaper’s divisions (or service provided) are: monthly maintenance, repairs, remodeling and new installations. Can they decide that they will accept credit cards for monthly service and repairs but not on remodeling and new installations? Therefore, could it be considered to be a convenience to allow a customer to use a credit card for a new installation since it's not a standard payment method for that division? Another question: Can a company decide that their standard payment methods are cash, check and credit cards for jobs up to a certain amount on money (say $7,000) and over that certain amount accept only cash or check? Therefore, can they charge a convenience fee for accepting a credit card for a project over $7,000? Thanks for the help!!
On September 26, 2009 Ben said:Hi Cara,
Thanks for the question – I hope I can shed some light on your dilemma. It sounds like you're dancing dangerously close to discrimination. Allowing only certain customers to use a credit card as a form of payment based on which of your services they're purchasing can be interpreted as discrimination based on payment method.
This is assuming that you're using the same merchant account to collect charges for every division of your company. If each division is a separate legal entity it would qualify for its own merchant account. Doing this would allow you to accept all forms of payment, including credit cards, for monthly service and repairs but not for installations.
You've gone on to say that, "could it be considered to be a convenience to allow a customer to use a credit card for a new installation since it's not a standard payment method." This statement is at the heart of the convenience fee conundrum. For example, that would be essentially the same thing as a retail store adopting a policy mandating that customers that use credit cards have to pay more when purchasing green widgets simply because they're the most expensive.
You're on the right track in regard to offering a bona-fide convenience, but this convenience can't be product specific; at least that's the way I interpret the regulations. That doesn't mean that I'm correct. Have you contacted your acquiring bank with your question? Note that your acquiring bank is probably not your merchant account provider, but instead the bank that actually moves money for your transactions. If you don't know, you can find this information out by contacting your provider or by looking at your merchant service agreement.
But I digress...
The problem with convenience fees in an industry such as yours is the typical large average ticket. Even if you took the earlier suggestion of getting two merchant accounts thereby allowing you to charge a convenience fee on installations, you would still be limited to a flat fee instead of a percentage of the transaction. I would assume that the cost of new installations varies widely.
Yours is not a typical situation, and I wish I could offer more helpful insight. I would suggest contacting your acquiring bank as noted earlier. As sometimes happens, I will be sure to email you if additional information comes our way that will prove helpful.
On October 31, 2009 Kate said:Can a merchant not charge a convenience fee for a deposit but then charge a convenience fee for the remainder of the balance due ?
On November 2, 2009 Ben said:Hello Kate,
Thank you for the great question. It doesn't sound like this is a case where the fee would be charged for a bona fide convenience as the guidelines mandate, but instead as an across the board charge. If that's incorrect, there's still the issue of the following two guidelines per Visa's policy:
- Is included as part of the total transaction
- The customer must be given the opportunity to cancel prior to the completion of the transaction
On November 2, 2009 Catherine said:Okay, I work for a non-profit church & school. We have just started to take on credit cards payment for tuition. But the first month we realized that we being charged quite a bit from the banks. So, my question is can we use 2.5% as a conivence fee for tuition payments. We also have church members who also want to do their offerings using a credit card, (they like it because they get air miles ).
On November 2, 2009 said:Hello Catherine,
Many people don't realize that merchants are paying for their credit card rewards - not the issuing bank.
Your situation is where convenience fees are meant to be employed. You've just got to take care to follow all of the guidelines. Since Visa is the largest card brand (volume wise) with the most extensive guidelines, it's recommended that you use their guidelines as a benchmark.
Make sure that you're disclosing in your literature for the school and the church that cash, check, etc. are the primary methods of payment and that credit cards are offered as a convenience. You can only charge a convenience fee on card not-present transactions. And you can't use the convenience fee on recurring transactions. For example, if a credit card is being billed on a recurring basis for tuition – a convenience fee is out of the question. Same goes for the offerings in the church.
You also can't vary the convenience fee to match a processing charge. The fee must be a flat amount regardless of the amount of the transaction.
On November 2, 2009 Catherine said:Thank you for answering my question, but just so I understand. I can't charge a 2.5% convenience fee, but I can charge a flat rate. Right?
On November 2, 2009 Ben said:Hello Catherine,
Per the guidelines, a convenience fee "must be a flat or fixed amount regardless of the amount of payment due." Making the convenience fee a percentage would cause the amount of the fee to vary with the size of the payment due. It must be a flat fee regardless of the amount of the charge.
On November 5, 2009 Michele said:We have apartment communities and we want to start accepting credit card for rent but due to rent cost, fees can be $50-$100 per transaction. Since we don't accept payment usually that way it appears that a convenience charge to offset some of the fees could be possible. However, I think you are saying that we cannot regularly accept credit card payments for their rent if it's the same amount. What if they pay different amounts by credit card and they have to call it in each time. Some people want the points their card offers.
On November 5, 2009 Ben said:Hello Michele,
This is a great question. The answer lies in differentiating recurring transactions from transactions that occur often, frequently for the same amount. The guidelines state that convenience fees "cannot be added to recurring transactions."
Here's how Visa defines a recurring transaction in their Card Acceptance and Chargeback Management Guidelines for Visa Merchants:
"A recurring transaction is one in which a cardholder authorizes a merchant to automatically charge his or her account number for the recurring or periodic delivery of goods or services. A typical recurring transaction might be an automatic bill pay for Internet or cable television services, a monthly newspaper subscription, or a health club membership.
Because transactions are processed automatically, without direct participation of the cardholder, they are particularly liable to potential disputes and copy requests."
What you're doing does not qualify as recurring transactions. If your tenants are given the option of paying their rent with a credit card over the phone as a convenience - it's their choice whether to use this option. If they do choose to use their card, the transaction will still be processed manually by you or your staff - it will not be processed automatically, without direct participation of the cardholder.
I would also like to note that you should never vary the original amount of a credit card transaction for any reason. Doing so would be against your merchant processing agreement.
Also remember that the convenience fee must be a flat fee. It can't vary from one renter to the next depending on the rental fee. Also, make sure to clearly define payment options by disclosing to renters that credit cards are offered as an alternate payment channel for their convenience.
I'm no expert in real estate and renting, but I would assume you probably want to place your payment option in your lease. Talk to your lawyer and see what they recommend as far as this is concerned.
On November 6, 2009 Marti said:When I received my property tax statement from Linn County, Oregon it offered payment by credit card with a 2.5% fee.
Is this legal? 2.5% of $2500.00 is pretty hefty!
Thank you, Marti
On November 6, 2009 Ben said:Hi Marti,
I agree that's a pretty large fee. I'm not a lawyer, and therefore can't give legal advice. Objectively, charging a percentage of a transaction as a convenience fee is against Visa's guidelines. With that said, I doubt a municipality would release payment literature without a lawyer or two looking things over.
If you want to see if there's anything that you can do about the 2.5% fee, I would suggest that you contact a local attorney that specializes in bankcard law.
On November 14, 2009 Kelly said:Where I work, we accept credit and debit cards. The thing that bothers me is that we are required to charge a service charge when the customer pays by card. Also, it is not posted anywhere about the charge and we were told not to say anything unless we were asked. Is legal in Illinois?
On November 18, 2009 Ben said:Hello Kelly,
I'm not sure of the legality of the situation, but charging customers an undisclosed fee because they're paying by credit card is against the card brands' guidelines.
On November 20, 2009 Steve said:Membership dues in a homeowners association must be charged equally to all members. Do you believe this would preclude use of any and all credit cards give the convenience fee and related issues discussed in your two articles on the topics?
On November 20, 2009 said:Hello Steve,
There's no reason why an association couldn't charge a convenience fee for membership dues. The underlying charge on which a convenience fee is imposed has little relevance so long as the guidelines surrounding the convenience fee are adhered to. Visa's guidelines are the most comprehensive. Following theirs will yield compliance with the other three major card brands.
A convenience fee could be charged for membership dues so long as the list of guidelines in Visa's Card Acceptance and Chargeback Management Guidelines for Visa Merchants (page 10) is followed. You can see this list by looking in the article above, or by following the previous link.
Here's how a convenience fee would need to be addressed for your situation:
First of all, the fee must be charged for a bona fide convenience. For example, if the association customarily accepts cash and checks for dues – but is now accepting credit cards - this constitutes a bona fide convenience because the association is offering a payment channel that is outside of its normal business practices.
The convenience fee must be clearly disclosed as such to homeowners.
A convenience fee can only be applied to card-not-present transactions. For example, you would not be able to charge a convenience fee is homeowners come to an office and swipe their card to pay membership dues. This would be a retail or card-present transaction.
The fact that your membership dues are constant is irrelevant - In fact, it's beneficial to you. What matters is that the convenience fee is always the same amount regardless of the underlying charge. A convenience fee must be a flat amount. It cannot be a percentage of the underlying charge.
The convenience fee must be applied equally to all alternate payment channels.
Convenience fees cannot be charged for recurring transactions. Take a look at the answer to Michele's question on November 5th. Just because you charge the same amount for dues on the same date every month or year, does mean that such transactions are recurring.
Convenience fees cannot be imposed by a third-party. For example, if the association uses a third-party billing service to process payments, you would not be able to impose a convenience fee.
Homeowners must be advised of the convenience fee and given the ability to cancel the transaction without penalty prior to its completion.
I hope this explanation helps. Please do take a look at Visa's guide linked in the text above.
On November 23, 2009 Shannon said:My company maintains a strict Visa and MasterCard only policy. We have some customers that want to pay with American Express, we typically decline these due to the large fees associated. Can we charge a Convenience fee on American Express charges that we do not charge for other Cards? Also, we do not list Credit Cards as a payment option on our invoices. We do have some customers who request the option but most of the times the option will be offered when the account is in collections. Can we charge a convenience fee for all cards in this case?
On November 24, 2009 Ben said:Convenience fees must be applied equally to all payment channels. That means that if you charge a convenience fee on America Express transactions, you would have to charge the same convenience fee for all other credit card transactions including Visa and MasterCard.
From your question it sounds like credit cards aren't a normal payment option for your business. If you're offering credit cards as a bona fide convenience for your customers - you can charge a convenience fee.
On November 24, 2009 Curtis said:We are developing a highly specialized electronic product that delivers $$ to accounts. (keeping it simple here...) We want the delivered amount to be equal to what the customer requested and to roll the credit card fees into the transaction along with whatever other costs we need to provide the service. All transactions will be electronic. However, $20 charged to a credit card is much different than $1000 charged, from the fees perspective. I am struggling on how to provide the service and charge for the expenses. This is not a donation where the amount received is less than the amount charged and the 'charity' received less. This is similar to Catherine's questions/answers, however; we have no other method of payment planned.
Any more insight would be grand, as I do not want to charge the same fees for the $1000 as the $20???
On November 25, 2009 Ben said:Hello Curtis,
What you're looking to accomplish is not what convenience fees are meant for. You said you want "to roll the credit card fees into the transaction." Convenience fees aren't meant as a way of circumventing processing fees. Doing this is considered surcharging, which is against guidelines.
On December 3, 2009 Kathy said:We are in independant insurance agency and would like to accept credit card payments from our clients. I read the response to Rosie posted 04/15/09. While many of the criteria may be the same not all of our transactions are done face-to-face. Is it possible to still pass part of the cost of processing on to our clients?
On December 3, 2009 Ben said:Hello Kathy,
As noted above, "it's important to understand that a convenience fee is not to be used as a method of passing credit card processing charges to customers."
Convenience fees aren't supposed to be a way around processing fees. If you're looking to pass processing costs to your clients, you'll want to read these articles:
- Charging Customers a Fee to Pay with a Credit Card
- Can a pass fees to customers by charging them to pay with a credit card?
If your business's primary payment channel is credit cards, the ability for clients to pay using a credit card does not constitute a bona fide convenience.
On December 21, 2009 Brandon said:I have a mobile business. The bulk of my customers get billed and send in checks. However, I do accept Cash and Credit Cards as payments for those customers that are not "regular" customers on a billing cycle. Since my business is mobile, all credit card transactions are done by calling in the sale and not swiping. Can I charge a convenience fee to those who wish to pay on site with a credit card, or do I have to officially offer a "cash discount"? A follow-up question is this: If I can charge a flat convenience fee or cash discount, can I still advertise (Yellow Pages, Web-Site, etc...) that I accept Credit Cards? Thank You for your help.
On December 28, 2009 Donna said:I accept VISA & MasterCard at my boarding kennel. Occasionally clients will have a neighbor bring their dog in and ask me to use the card we have on file. I am charged more when I punch in a number vs. swiping it. Can I pass this on to my clients as a convenience fee?
On December 28, 2009 said:Hi Donna,
One of the guidelines for charging a convenience fee is that the fee is applied to payment channels that are offered as a bona fide convenience to your customers. It sounds like credit cards are a primary payment channel for your business. You can't split credit card payments into subcategories by method, I.E. card-present versus card-not-present transactions for the purpose of applying a convenience fee.
I understand that you're charged more for running a not-present transaction through a card-present merchant account. Depending on how much you process monthly by punching numbers in, it may be beneficial for you to get a second merchant account with target interchange at the not-present category.
Another method of mitigating credit card processing expenses is to offer a discount for cash customers. This method is explained in detailed in an article that's linked in a comment a couple rows above. Of course, this would raise costs for your customers that swipe their transactions along with non-swiped.
On December 30, 2009 Tyler said:I remember a few years ago MasterCard had a convenience fee program for educational institutions where they allowed schools to charge a convenience fee even on face-to-face transactions for tuition payments and such as long as they registered with MasterCard. Do you know if this program still exists and if Discover does something similar? If it still exists, do you have any additional information or know of any good resources where I can learn more? Thank you!
On December 30, 2009 Ben said:Hello Tyler,
MasterCard did in fact have a convenience fee program back in 2007 that was outlined in their document aptly titled "The MasterCard Convenience Fee Program."
There is no current mention or documentation of this program on MasterCard's website. Whether or not the program is still in affect is not certain. Stay tuned, we've sent a contact to MasterCard to clarify the details about this program.
Our finding will be posted here as soon as we receive a response.
On January 27, 2010 Todd said:It sounds like Visa doesn't even allow you stagger convenience fees. We have citation collections between $20.00 and $2,000.00 that we collect by mail in only at the moment. We would like to offer on-line credit card collections, and as an example, we would like to charge $2.00 convenience fee on citations under $100.00 and $5.00 on all others. It sounds like this is not possible under visa rules. Is this correct?
On January 27, 2010 said:Hello Todd,
I'm not sure what you mean by citations. If your organization is a government or municipal agency, it may qualify for the Visa Tax Payment Program. Please read more about this program in the article above or on Visa's Web site.
On March 25, 2010 joel said:So, if I understand all of this correctly, even a very small merchant like a solo practitioner psychiatrist who does not regularly take credit cards -- cannot charge a convenience fee if it is a face-to-face transaction. But, that same practitioner can decide to give a discount for cash. Is that correct. And, if so, for both Visa and Mastercard.
On March 26, 2010 said:Hi Joel,
Convenience fee regulations don't have language pertaining to the size of a merchant. Convenience fees are meant to be just that, a fee charged by a merchant for offering the convenience of payment channel or method that is outside of their normal practice.
You are correct in that you can offer clients a lower price for cash purchases so long as the cash price is clearly marked as a discount.
On March 30, 2010 Liz said:We have several large accounts that like to pay a portion of their balance due by credit card. We want to charge a 3% fee to those customers. This would not apply to customers who pay a specific invoice by credit card. Is this considered discrimination, and is there a way to get around this? Thanks very much.
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