Who Really Benefits from Surcharge Fees?

Why Payment Processors Gain More Than You Do from Surcharging

By Merchant Advocate

Passing credit card fees on to customers, commonly known as surcharging, has become increasingly popular across a multitude of industries, with one third of small businesses reporting they have a surcharge program (J.D. Power Survey, 2025). But are these businesses truly saving money? Before implementing a surcharge or cash discount program, make sure you understand the risks. Many businesses don’t realize how much their payment processor benefits, and often at their expense.

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Surcharge Fees 101: Are You Actually Saving?

It might seem like passing fees to customers helps your bottom line, but in reality, processors profit the most. These programs typically apply a flat surcharge that exceeds the actual processing cost, increasing the processor’s revenue while putting businesses at risk of:

  • Higher customer pushback on pricing

  • Compliance violations with Visa, Mastercard, and state regulations

  • Unintended financial risks that impact long-term profitability

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It might seem like the merchant wins by passing processing costs to their customers, but surcharge programs actually benefit the processor far more than the businesses that adopt them. These programs apply a flat fee on credit card transactions that often exceeds the actual cost of acceptance.

The Numbers Behind Surcharge Fees

Navigating the Complex Rules of Surcharging and Fee Disclosure

State laws and card network regulations on surcharges vary. Failure to comply can result in fines or even loss of processing privileges.

A recent case

A business owner was misled by their processor about state surcharge rules. If they had implemented the program, they would have been in violation as of July 1, 2025. Avoid costly mistakes by getting an expert review of your surcharge program today.

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Don't Overlook the Tax and Reporting Responsibilities

Implementing a surcharge program involves additional tax reporting requirements. Payment processors and card networks typically require businesses to provide advance notice when adding a surcharge.

Additionally, businesses must accurately report surcharge revenue on their tax forms, including 1099-K filings, to avoid audits or penalties.Understanding these obligations is essential to maintain compliance and financial accuracy.

Cash Discount Programs: A Safer Alternative

Learn About Cash Discounting: Reduce Costs Without Risk

Cash discount programs allow businesses to offer a price reduction for customers who pay with cash, rather than adding extra fees to card transactions. However, some programs misrepresent themselves as compliant when they are not.

To ensure compliance:

  • Display full-service prices and apply the discount only to cash payments

     

  • Avoid deceptive pricing that functions like an illegal surcharge

     

  • Use compliant technology to handle fee tracking automatically

     

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A Safer Way to Manage Credit Card Costs

Find & Reduce Fees Without Switching Processors

Before adopting a surcharge program, businesses should explore other cost-saving measures. Reviewing merchant statements can help identify hidden fees, overcharges, or other optimization opportunities. Merchant Advocate specializes in saving businesses money without switching processors and can help advise you about how to lower acceptance costs.

If you choose to move forward with a surcharge program:

Follow all applicable laws and card network rules.

Utilize compliant technology to automate fee handling and tracking.

Monitor your program’s performance to protect your business from regulatory or reputational risks.

Before adopting a surcharge program, businesses should explore cost-saving measures that don’t add customer frustration. Merchant Advocate specializes in identifying hidden fees and negotiating lower processing costs—all while keeping your current processor.

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