Credit Card Surcharges Cut Volume but Love for Rewards Is Strong

You’ve probably witnessed this scene at a fancy restaurant, or experienced it yourself.

The waiter brings the check to a couple who has just finished dining. The sharper-eyed of the spouses — people who are dating are less likely to dwell much on the bill, afraid of seeming tight with a buck — runs an eye down the slip and stops when they see “credit card surcharge” and the disclosure that the restaurant charges 3% or 4% for the privilege of paying with plastic.

The waiter is beckoned over to answer the question, “What’s this all about?”

That’s for first-timers. Today the diners likely either scouted the menu in advance or looked for a sign somewhere on the premises indicating that the establishment assesses surcharges.

Some consumers shrug at the presence of surcharges, but others resist by bringing lots of cash to dinner.

The root of the surcharges — they aren’t just assessed at restaurants — are the fees banking institutions, payment processors and networks charge the business for accepting credit cards. Figures vary with the source and with what’s included in the count. According to a study by CMSPI, a payments consultancy, credit and debit card swipe fees totaled $224 billion in 2023, while the Nilson Report, a card industry publication, puts the number at $172 billion.

Surcharges are intertwined with the issue of interchange fees, which support the credit card rewards that consumers love so much. Cash back, airline miles, room points and more don’t come out of thin air. The idea behind them has always been to stimulate sales in general for merchants and to grow volume for the issuer of the card, a battle for share of wallet. Merchants have long found interchange fees irksome and this has driven ongoing legal battles.

On the other hand, there’s the issue of gaining a sale versus losing a sale, points out Richard Crone, head of Crone Consulting, payments advisors. Many merchants fear losing the same over a surcharge.

Looking at the Impact of Surcharges On Consumer Attitudes and Retail Sales

At one level, it’s an issue for both merchant and banking institutions. J.D. Power’s 2024 U.S. Point of Sale Choice Study found that fully 43% of credit cardholders surveyed had set out to buy something with their card but opted not to use the card to make the purchase because they would have been surcharged.

About 20% of the merchants surveyed by CMPSI in its State of the Industry Report said that they assess surcharges. A 2023 consumer survey by LendingTree found that 69% of cardholders said they had been surcharged by a merchant, a telling indication of how often this is going on. Nearly a third of the consumers surveyed said the sellers didn’t warn them about the surcharge before running the transaction.

The study found that 73% of cardholders claimed that they would use their credit cards less frequently if they had to pay a merchant surcharge every time. Among women, that figure hit 84% and among cardholders making less than $75,000 a year, 80%.

“The massive cost of … swipe fees and their seismic impact on the profit margin and bottom lines of businesses around the country is such that many retailers decide that the ability to recoup those fees is worth the risk of alienating some customers.”

— LendingTree report

Yet, there’s evidence that surcharges reduce spending and revenue among sellers that assess the fees.

A mid-2023 study by Ipsos Channel Management, a consultancy, found that surcharging costs the average merchant more in lost sales than they recoup in surcharge fees. Further, the study found that firms that surcharge see a roughly 10% fall in same-store debit and credit sales as a result of consumers changing their buying behavior in response to surcharging.

Ipsos reported that merchant surcharging became more common in 2021 and 2022. This developed as more consumers shifted to plastic from using cash and as inflation began its climb.

“Merchants sought a method of mitigating increased credit and debit fees by passing those costs along to the customer,” the report said. The report says that in 2022 surcharging increased to 31% of independent and small merchants, especially in these categories: restaurants, hairdressers, liquor stores, convenience stores, gas stations and bakeries. Typical surcharge fees also rose, from 1-2% in 2019 to 3-4% in 2022, according to the report.

The Ipsos paper also noted that effects beyond a single lost sale. Consumers can change behavior in the wake of surcharges. For example, 17% stop shopping at places that surcharge credit cards, and 20% shift to cash. In addition, 14% reduce spending on both debit and credit cards to offset increased spending due to surcharges.

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The Legality of Surcharging for Credit Card Purchases

Surcharges began to surface in the mid-1990s, according to Richard Crone, coming up as “convenience fees” for recurring bill payments charged to cards. He says the practice violated the rules of Mastercard and Visa at that time, but they tended to look the other way because it represented an expansion for card usage. Payments processors gave away the processing to accommodate these fees for merchants, he adds, in order to pick up extra volume. A decade ago, “convenience fees” were barred by Mastercard, Visa, American Express and Discover, so the terminology changed to “processing fee” — now common in platforms for paying government taxes by card, for example.

Explicit surcharges have been allowed by Visa and Mastercard, except where barred by state law, since 2013, subject to certain rules and requirements. The surcharge is not supposed to exceed the merchant’s costs of accepting cards.

Broadly speaking, merchants are supposed to reveal surcharging practices. However, the LendingTree report said that its research suggests “that those disclosures aren’t happening or that customers simply aren’t seeing them before they buy, meaning the disclosures may not be sufficient.”

As surcharging has grown more prevalent, some states have reacted.

In early 2024, New York began requiring businesses to prominently disclose the existence of surcharges and both the cash and credit prices. A key excerpt: “… any such surcharge may not exceed the amount of the surcharge charged to the business by the credit card company for such credit card use.”

In mid-2024, California implemented pricing transparency on credit card transactions that, according to the state’s attorney general’s office, “makes it illegal for most businesses to advertise or list a price for a good or service that does not include all required fees or charges other than certain government taxes and shipping costs.”

Three states — Maine, Massachusetts and Connecticut — already barred surcharging and 12 other states pose certain requirements. Of that dozen, Florida technically bans surcharges, but the law is not currently enforceable because it was found to be unconstitutional in federal court. (For a detailed rundown on state laws, click here for a resource from Stax Payments.)

The Other Side of the Practice: The Points Mongers

Crone says that in the course of his consulting practice he has found that consumers are split 50%-50% on surcharges. For every credit card holder who has an aversion to surcharges, there is another who does the math and figures out where a card can be used to earn rewards that net a positive return when the merchant’s surcharge is accounted for.

Those sensitive to surcharges will typically switch to cash or a lower-cost option like PIN debit, which typically has no surcharge attached. Sometimes merchants prompt that behavior, he notes.

Crone observes that the growth of nonbank payment companies using debit cards to make incursions into credit card territory could change things significantly. A key example is PayPal, which is encouraging more use of its debit card through its PayPal Everywhere push. PayPal users’ ability to stack offers available for certain merchants through PayPal Honey, which provides cash back offers and coupon codes, could shift the competitive balance, Crone thinks.

This comes on top of the gradual shift in preference among many consumers for debit cards. A May 2024 study by PYMNTS.com confirmed younger consumers’ preference for debit cards and digital wallets, partly to avoid credit card interest.

However, the “points monger” factor can’t be ignored. The study found that an exception to the debit card trend among younger consumers is travel spending, where all age groups still lean towards credit cards.