Consumers have become accustomed to seeing an extra fee when paying by card at restaurants, shops and other businesses.
But whether that surcharge is allowed can depend on one important distinction: Is the customer paying with a credit card or a debit card?
Visa and Mastercard permit merchants to impose surcharges on certain credit-card transactions, subject to specific rules and limits.
Both networks, however, prohibit merchants from imposing those surcharges on debit-card transactions.
That distinction recently prompted a reader to contact The Geneseo Current and suggest a closer look at card surcharges being charged by area businesses.
The reader believed surcharging debit cards was prohibited by federal law.
The answer is a little more complicated.
Debit Cards Cannot Be Surcharged Under Visa and Mastercard Rules
Visa's current merchant guidance is explicit: U.S. merchants cannot impose a surcharge on purchases made with a Visa debit or prepaid card.
That prohibition doesn't change if the customer chooses "credit" rather than "debit" when using the card.
According to Visa, that choice determines whether the debit transaction is processed using a signature-based or PIN-based method. It does not transform the debit card into a credit card.
Mastercard has a similar policy.
Its merchant guidance says merchants may surcharge eligible Mastercard credit cards but that Mastercard continues to prohibit surcharges on its debit cards.
That means a customer using a debit card connected to a checking account generally shouldn't be assessed a Visa or Mastercard surcharge simply because the transaction was processed without entering a PIN.
Credit Cards Are Different
Credit-card surcharges can be permitted.
Visa currently allows a U.S. merchant to impose a surcharge on qualifying credit-card transactions, but the amount cannot exceed the merchant's applicable merchant discount rate or 3%, whichever is lower.
Merchants must also follow disclosure requirements, including informing customers about the surcharge and separately identifying it on the receipt.
Mastercard similarly permits surcharges on qualifying credit cards. Mastercard says the surcharge generally cannot exceed the merchant's applicable cost for accepting the card and is subject to its network rules and applicable state law.
So a business charging an additional fee for a credit-card purchase isn't necessarily doing anything improper.
The problem arises when a credit-card surcharge is also applied to a debit card.
Public Entities Operate Under a Different Framework
The rules can be different when the payment is being made to an Illinois local governmental entity rather than a private business.
Under the Illinois Local Governmental Acceptance of Credit Cards Act, the state's definition of "credit card" is broader than the term is commonly used. For purposes of that law, it includes debit cards, ATM cards, prepaid cards, smart cards and several other payment instruments.
The Act allows a local governmental entity that accepts card payments to impose a convenience fee or surcharge to offset some or all of the processing costs it incurs.
That does not mean a public entity has unlimited authority to add fees to debit-card transactions. The Illinois law specifically states that a convenience fee or surcharge may be applied only when it is allowed under the operating rules and regulations of the card involved. The law also places limits on the amount and use of those fees.
Card-network rules themselves recognize special arrangements for some government payments. Visa, for example, permits certain government and education merchants to assess qualifying service fees, while Mastercard has a convenience-fee program for participating government and education entities.
That makes the distinction important: a standard surcharge imposed by a private merchant and a qualifying convenience or service fee associated with a government payment are not necessarily governed by the same rules.
So the prohibition on surcharging Visa and Mastercard debit cards discussed in this article should not be interpreted to mean that every fee associated with using a debit card to pay a public entity is prohibited.
What About Federal Law?
This is where the issue can get confusing.
Federal law regulates certain fees associated with processing debit-card transactions, but those fees are not the same as the surcharge a customer may see at checkout.
Under the Durbin Amendment and the Federal Reserve's Regulation II, certain interchange fees — fees paid behind the scenes as part of processing a debit-card transaction — are regulated.
A surcharge is different. It is an extra fee a business charges directly to a customer for using a particular payment method.
So while federal law regulates certain debit-card processing fees, it is not accurate to simply say that federal law prohibits all debit-card surcharges.
For ordinary private merchants, what is clear is that Visa and Mastercard prohibit merchants from adding standard surcharges to transactions made with their debit cards, including when a debit card is run as "credit."
A "Cash Discount" Isn't Necessarily the Same Thing
Consumers may also encounter businesses advertising a discount for paying cash.
That can be different from adding a card surcharge.
Visa allows merchants to offer discounts or incentives for customers using another payment method, including cash. But its rules distinguish a genuine cash-discount program from adding an extra fee at checkout.
Visa says that for a compliant discount offer, the merchant can display the card price or display cash and card prices side-by-side. The final card price should not be created simply by adding an extra card fee to the advertised price at checkout.
Mastercard's rules likewise distinguish surcharges from discounts for cash payments.
That means the wording on a sign alone doesn't necessarily determine what the transaction actually is.
How prices are advertised, how the transaction is processed and what appears on the receipt can all matter.
Some Businesses May Not Realize How Their System Is Configured
A debit-card surcharge also doesn't necessarily mean a business owner deliberately decided to violate a payment network's rules.
Many businesses use third-party payment processors and point-of-sale systems to calculate fees automatically.
Whether those systems correctly distinguish between credit and debit transactions can be an important question for merchants to ask their payment processors.
Visa says debit cards can be identified electronically during processing, while Mastercard says its debit cards can be identified electronically by the card's Bank Identification Number, or BIN.
For a business using a surcharge program, that distinction matters.
A system configured simply to add a percentage to every card transaction could potentially result in a surcharge being assessed where Visa or Mastercard rules prohibit it.
What Consumers Can Look For
Consumers who encounter a card fee can start by looking at their receipt and asking what kind of card they used — and who they are paying.
If it was a Visa or Mastercard credit card used at a private business, a surcharge may be permissible if the merchant followed the applicable rules.
If it was a Visa or Mastercard debit card used at a private business, the networks' standard surcharge rules prohibit a surcharge — even when the transaction was processed by selecting "credit."
Payments to governmental entities can involve different convenience- or service-fee rules and should be evaluated under the applicable state law and card-network program rather than automatically treated the same as a retail surcharge.
Consumers should also distinguish between a surcharge and a properly structured cash discount.
Visa provides an online form through which cardholders can report potential violations of its acceptance rules. Visa says information submitted through the form may be investigated to determine whether a merchant violated Visa rules.
Visa's merchant surcharge guidance
Mastercard's merchant surcharge guidance
Illinois Local Governmental Acceptance of Credit Cards Act
For local businesses, the issue may be worth reviewing with their payment processor as well.
Card-processing costs are a legitimate expense for businesses, and surcharging eligible credit-card transactions can be one way of addressing those costs.
But credit and debit cards aren't interchangeable when it comes to surcharge rules.
And whether the payment is being made to a private merchant or a governmental entity can make a difference, too.