As software-as-a-service (SaaS) providers, independent software vendors (ISVs), and other service providers increasingly integrate payment processing into their platforms, many are exploring credit card surcharge programs that let merchant customers pass along some or all of their credit card processing costs. Surcharging offers merchants a meaningful way to recover processing expenses and gives the platform an added value that helps attract and retain customers.
However, implementing a surcharge program is more complicated than simply adding a percentage-based fee at checkout. Credit card surcharges are governed by state laws, card brand rules, and consumer protection requirements, all of which impact which transactions may be surcharged, how much may be charged, what disclosures must be provided, and how the surcharge must be processed and refunded. For ISVs seeking to offer surcharging as a standardized feature across a large merchant portfolio, these requirements present additional challenges. A compliant surcharge program must account for differences among merchants, payment methods, jurisdictions, and card brands while providing a consistent and transparent customer experience.
Why ISVs Are Interested in Credit Card Surcharging
Many SaaS companies and ISVs integrate payment processing directly into their products through payment facilitator arrangements, embedded payments partnerships, or other integrated solutions. These arrangements allow ISVs serving industries such as property management, healthcare, hospitality, professional services, and field services to provide a more seamless payment experience, strengthen relationships with their merchant customers, and participate in payment processing economics.
At the same time, merchants are increasingly pushing back on payment acceptance costs. A surcharge program can help address those concerns by allowing merchants to assess an additional fee when a customer chooses to pay by credit card. For example, a merchant that incurs a 2.75% cost to accept credit cards might implement a surcharge of up to 2.75%, subject to applicable legal and card brand limits.
For the merchant, the principal benefit is the ability to offset credit card acceptance expenses. For the ISV, offering this functionality can make an ISV's embedded payments solution more attractive to merchants that are sensitive to payment processing costs. A surcharge functionality can also strengthen merchant retention by making the software platform more integral to the merchant's payment operations. Finally, ISVs may be able to monetize surcharge functionality through a separate program fee, such as a subscription fee, per-transaction fee, or fee calculated based on successfully surcharged transaction volume.
Understanding the Legal Framework for Credit Card Surcharging
Credit card surcharging is not prohibited under federal law, but it is subject to a patchwork of state-by-state requirements and restrictions, as well as card brand rules.
Most states permit merchants to impose credit card surcharges, but several jurisdictions, such as Connecticut, Maine, Massachusetts, and Puerto Rico, generally prohibit or restrict credit card surcharging. Other states, including California, Colorado, Kansas, Minnesota, New Jersey, New York, Oklahoma, and Texas, permit surcharging subject to restrictions on surcharge amounts and disclosure and pricing requirements.
State law differences make a uniform surcharge program difficult for ISVs serving merchants in multiple jurisdictions. New York, for example, requires surcharging merchants to clearly and conspicuously post the total credit card price, inclusive of the surcharge, and prohibits charging more than that posted price, which in practice may require dual pricing that shows both the credit card price and the lower price for other payment methods. To manage these variations, a platform may need jurisdiction-specific controls, such as prohibiting surcharging for certain merchants, imposing lower surcharge limits in particular states, or building a checkout experience that accommodates the various disclosure requirements.
ISVs must also consider increasingly common state price transparency and mandatory fee laws, separate from surcharge-specific rules. States such as California, Minnesota, and Virginia have enacted laws to prevent businesses from advertising one price and adding mandatory fees later in the purchasing process, so that consumers understand the total price before buying. A credit card surcharge generally is not a mandatory fee where the merchant offers a genuine surcharge-free alternative, such as debit or ACH, because the customer can avoid it. Where a merchant effectively requires credit card payment, however, the surcharge may be considered mandatory and subject to applicable "total price" disclosure requirements.
Card Brand Rules Governing Surcharges
In addition to state law, merchants must comply with the surcharge rules established by the card brands. The card brands generally permit credit card surcharging under certain circumstances, but their requirements are not identical, and some brands impose conditions on how surcharges are applied to their cards relative to other payment products. ISVs whose merchants accept multiple card brands should carefully assess each brand's current rules to confirm that a surcharge program can be structured to satisfy all of them.
Card brand rules generally permit surcharges only on eligible credit card transactions and restrict surcharging debit and prepaid cards, so the platform must be able to distinguish eligible credit card transactions from debit, prepaid, and other ineligible transactions before applying a surcharge. The rules also cap the surcharge, typically at a percentage of the transaction amount or the merchant's cost of acceptance, with caps varying by brand, and may require advance notice to, or registration with, the brand and/or the acquirer under procedures that differ by brand and may change over time. Finally, merchants must clearly disclose the surcharge before the customer completes the transaction, including that it is imposed by the merchant and the applicable amount or percentage, and must separately identify it on the receipt.
Practical Considerations for ISVs Implementing Surcharge Programs
For ISVs, the principal challenge is translating these legal and card brand requirements into a scalable software product. Unlike an individual merchant implementing a surcharge at a single location, an ISV may need to support hundreds or thousands of merchants operating in different states, using different acquiring arrangements, and paying different processing rates. A successful program therefore requires more than standardized disclosure language or a configurable surcharge percentage. Compliance considerations should be incorporated into the platform's architecture, merchant onboarding processes, transaction processing logic, and ongoing monitoring.
Coordinate with Acquiring Banks and Payment Processors Before Development
An ISV should begin by confirming that its acquiring bank or payment processor supports the proposed surcharge model. Not all acquiring arrangements support the same surcharge functionality, and some processors impose requirements that are more restrictive than the card brand rules.
Build Transaction-Level Eligibility Controls
A scalable surcharge program should determine whether a surcharge is permitted for each transaction before applying the fee. At a minimum, the platform should evaluate the card type, applicable jurisdiction, merchant eligibility, required card brand notifications, and permissible surcharge amount. The platform should also distinguish between credit and debit cards using reliable card identification data, such as bank identification number (BIN) information or other data provided by the payment processor. This distinction is critical because debit cards cannot be surcharged merely because a customer selects a credit processing option.
Design the Checkout Experience Around Clear Disclosures
Consumer disclosures are among the most visible aspects of surcharge compliance and an important source of potential consumer complaints. ISVs should design their checkout flows so that customers understand the surcharge before committing to a transaction.
For an online transaction, this generally means presenting the surcharge policy before the customer enters payment information and displaying the actual surcharge amount and final transaction total before payment authorization. The surcharge should be clearly identified as a fee imposed by the merchant for paying with a credit card. The checkout process should also allow customers to select another available payment method after seeing the surcharge.
ISVs should also consider recurring payment arrangements, which create additional compliance challenges. Customers enrolling in automatic payments should receive appropriate surcharge disclosures before enrollment, and the platform should establish procedures for addressing changes to surcharge rates.
Address Refunds, Disputes, and Transaction Reporting
Surcharge compliance does not end when a transaction is authorized. The platform must also properly account for surcharges in refunds, reversals, chargebacks, settlement, and merchant reporting. The platform should also ensure that surcharge amounts are included in the authorized transaction total and separately identified in transaction data where supported by the processor. Merchant reporting should distinguish surcharge amounts from the underlying transaction amounts so merchants can understand their surcharge revenue, reconcile payments, and respond to customer inquiries.
Update Merchant Agreements and Compliance Responsibilities
Although the surcharge is imposed by the merchant, the ISV may be responsible for much of the technology used to calculate, disclose, and process the fee. This division of responsibilities should be addressed contractually. ISVs should consider implementing surcharge-specific merchant terms that explain the program, establish merchant responsibilities, and allocate compliance obligations between the parties. The agreements should also reserve the ISV's right to modify, suspend, or terminate surcharge functionality where necessary to address legal, card brand, or processor requirements.
Determine How to Price the Surcharge Solution
The customer agreement should clearly explain how the surcharge service fee (if any) is calculated. For example, an ISV may charge a program fee based on the volume of eligible credit card transactions to which a surcharge was successfully applied. The contractual structure should accurately reflect the economics of the program and avoid suggesting that the merchant will necessarily recover all of its processing expenses.
Implement Ongoing Monitoring and Compliance Oversight
Finally, ISVs should recognize that surcharge compliance requires ongoing oversight. State laws, card brand rules, and processor requirements can change. Merchant processing costs may fluctuate, and new payment methods or transaction flows may introduce additional compliance considerations. ISVs should therefore establish procedures for periodically reviewing surcharge configurations, confirming that merchant rates remain within applicable limits, and testing checkout disclosures. The platform should also maintain transaction-level records documenting when surcharges were applied, the amounts charged, the disclosures presented, and any subsequent refunds or disputes.
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For SaaS companies and ISVs, credit card surcharging represents an opportunity to enhance the value of embedded payments, help merchant customers manage payment acceptance costs, and potentially generate additional revenue. However, the regulatory and operational requirements associated with surcharging make it important to approach the functionality as a distinct payments product rather than a simple checkout feature. The most effective programs will incorporate compliance requirements into the platform's underlying technology, including transaction eligibility determinations, jurisdictional restrictions, merchant-specific surcharge limits, customer disclosures, refund processing, and ongoing monitoring.