Credit Card Convenience Fees Explained: What Businesses Need to Know

Nowadays, customers expect the convenience of being able to pay with a card, no matter what sort of transaction they’re making.

But for merchants, there are sizeable fees required to accept credit card payments. In fact, credit card processing is their second largest operating cost for US businesses, second only to labor.

Some merchants choose to counteract processing costs by charging a convenience fee with each card transaction. We’ve all run into these fees when buying movie tickets or paying bills online, but most consumers don’t think fondly of them.

Credit card payment fees can be a significant consideration for businesses. It’s important for businesses to consider the implications of charging convenience fees for card transactions. Your processing costs will be covered, but the fee might also cause customers to look elsewhere for the product or service you’re offering. However, not accepting card payments will likely have the same effect.

If you’re considering charging a convenience fee, you probably have a few questions. Today, we’re going to explore some of the most common questions we see about convenience fees and give our best advice:

What is a Convenience Fee?

A convenience fee is a charge imposed on customers for using a non-standard payment method, such as a credit card, to make a payment. This fee is typically charged by merchants to offset the costs associated with processing fees. When customers opt to pay with a credit card instead of a preferred payment method like cash or check, merchants may add this fee to cover the additional expenses incurred during the transaction.

Definition of a Convenience Fee

A convenience fee is a type of fee that is charged to customers for the convenience of using a credit card or other non-standard payment method to make a payment. This fee is usually a fixed amount rather than a percentage of the transaction amount. Whether the transaction is for a small or large sum, the convenience fee remains consistent, ensuring transparency and predictability for customers.

Why Do Merchants Charge Convenience Fees?

Merchants charge convenience fees to offset the costs associated with processing credit card transactions. These costs can include credit card processing fees, which can range from 2% to 4% of the transaction amount. By charging a convenience fee, merchants can manage these expenses without significantly impacting their profit margins.

Reasons for Charging Convenience Fees

There are several reasons why merchants charge convenience fees:

1. To Offset Credit Card Processing Costs: Credit card processing fees can be a significant expense for merchants. Convenience fees help to cover these costs, ensuring that the business remains financially viable.
2. To Discourage Credit Card Use: Some merchants may charge convenience fees to discourage customers from using credit cards, which can be more expensive to process than other payment methods like cash or checks.
3. To Generate Revenue: Convenience fees can also be a lucrative source of revenue for merchants, especially for those who process a high volume of credit card transactions. Let's look at the average cost of accepting a debit card for example at less than 1%. When a 3-4% convenience fee is added, not only did they cover the cost of transactional fees but added roughly 2% to their profit from the sale. This additional income can help support the business’s operations and growth.

Laws and Regulations Governing Convenience Fees

Convenience fees are governed by various laws and regulations to ensure transparency and fairness in credit card transactions. These regulations help protect consumers from unexpected charges and ensure that merchants disclose any additional fees upfront.

Overview of Relevant Laws and Regulations

The following laws and regulations govern convenience fees:

1. Truth in Lending Act (TILA): This act requires merchants to disclose any fees associated with credit card transactions, including convenience fees. Transparency is key, and customers must be informed about any additional charges before completing their payment.
2. Fair Credit Billing Act (FCBA): This act prohibits merchants from imposing surcharges on credit card transactions unless the customer is given prior notice and the surcharge is reasonable. It ensures that customers are not unfairly charged without their knowledge.
3. Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act): This act amended the FCBA to further restrict surcharges on debit card and prepaid transactions. It aims to protect consumers from excessive fees and ensure fair practices in the financial industry.

By understanding and adhering to these laws and regulations, merchants can ensure that their practices are compliant and that their customers are treated fairly.

When can I charge a convenience fee?

There are a few rules as to when a merchant can and can’t charge a convenience fee. The cardinal rule is that a merchant cannot charge a convenience fee if card-not-present is the only form of payment they offer. For instance, if you are an online-only boutique and customers don’t have the option of paying in cash or by check, you cannot charge a convenience fee when accepting payment methods.

Essentially, convenience fees are designed to be used only when a customer pays with a credit card in lieu of a preferred form of payment. Alternatively, using alternative payment methods like cash, checks, or ACH transfers can help consumers avoid these fees.

This statement leads us into the second rule: To charge the fee, a level of convenience must be evident to the consumer. For instance, it is much easier for me to call my favorite pizza place and place an order over the phone than it is for me to drive there and pay in person. Because ordering over the phone is more convenient for me, a convenience fee would be permissible. However, keep in mind that if your company charges a convenience fee, it must be universal to any payment method in that channel. If, for some odd reason, my local pizza joint accept bitcoin payments for phone orders, I’d pay the same convenience fee with bitcoin as I would with a debit card.

I mentioned earlier that you often see convenience fees charged when paying bills online. While this is allowed for one-time payments, automatic recurring payments cannot incur an additional convenience fee with each occurrence.

Lastly, convenience fees can’t be kept secret. Law requires that merchants inform their customers of any convenience fees before charging them. Your state may have additional laws surrounding convenience fees, so make sure to do your research before setting one up.

Credit Card Networks and Credit Card Payments

While we’re on this topic, you should know that there are not only legal restrictions on convenience fees, but credit card networks and credit card issuers have their own set of rules for merchants as well. Any merchant account you open will bind you to these rules, but luckily for you, these requirements are fairly similar to the legal ones we discussed above. For instance, Visa, who has the strictest rules, says that in order to charge a credit card convenience fee:

1. The payment must happen across an alternative payment channel, such as by phone or online.
2. Customers must be told about the fee or it must be clearly disclosed in advance of making the payment.
3. It must be a fixed amount rather than a percentage.

See? Not too different from what we already talked about. However, some networks have some interesting rules you won’t find elsewhere. For instance, Discover has a clause that says if you don’t charge a convenience fee for one type of card, you can’t charge it for Discover cards either. So, if a merchant decides that Visa’s rules are too strict and decides to go without charging a convenience fee for Visa card carriers, they cannot charge a fee for Discover card carriers either.

How much can I charge for a convenience fee?

Merchants may set their online-only convenience rates, but these must be a fixed amount, often structured as a flat fee, rather than a percentage. Whether a customer is completing a transaction worth one dollar or one million dollars, the convenience fee must be the same for every customer.

As far as how much to charge—it’s up to you, with one restriction: convenience fees cannot exceed the actual cost of card processing. Of course, you need to be reasonable with regards to your average ticket size. A concert venue that often sells tickets worth $300 or more might get away with charging a five dollar fee, whereas a movie theater selling tickets worth $10 could not. Convenience fees are a balancing act, so don’t overburden your customers with excessive fees.

Another thing to keep in mind is that convenience fees must be part of the total given for the transaction. They cannot be charged as a separate transaction, nor can they be dissolved into the cost of the product. The customer’s receipt must clearly show a convenience fee contributing to their total amount paid for the fee to be valid.

How do I explain charging convenience fees to my customers?

While many customers may not realize they are being charged a convenience fee, the savvy shopper is going to know what’s up.

If a customer confronts you about a convenience charge, the best course of action is to explain that it’s not about scamming an extra few dollars to inflate your profit margins, rather that it’s a necessity to continue to provide goods and services to your customers.

Without getting into the nitty-gritty of the credit card processing world, summarize for your customer that accepting credit card payments is an additional cost for your business and that by paying a convenience fee, they ensure that your business can continue to accept card payments in the future. You can also explain that credit card surcharges are optional fees that some merchants impose when customers use credit cards.

At the end of the day, the concept of a convenience charge outlines some of the issues within credit card processing. Merchants want to be able to provide the best experience possible for their customers and customers want the best price possible, but sometimes those things appear to be in conflict with one another. While some merchants choose to swallow the price of accepting credit cards, it isn’t possible for all business owners. Surcharges and convenience fees have different implications and legal considerations, so be sure to understand these distinctions. If charging a convenience fee is necessary for you, be sure to be fair and to check state laws. If handled correctly, a convenience fee can help increase your customer’s experience and maintain your bottom line.