The laws around credit card processing and interchange fees are confusing, but small businesses must stay compliant with the law. Here's what you need to know about processing and interchange fees, and how to avoid breaking the law.
Plastic makes the world go round, but for small business owners, accepting credit cards can mean additional charges from processing companies and confusingly tiered pricing structures. Setting up free credit card processing is an appealing option on the surface – after all, who doesn't like free? But you may be wondering why and how some companies claim to offer small businesses free processing while others charge fees.
Here's the unvarnished truth about free credit card processing, how those freebie companies operate, and what you can expect if you choose the no-cost route. We also offer a comprehensive guide to the best credit card processors for small businesses, which we review independently on an annual basis for our readers.
What is free credit card processing?
Traditional credit card processing methods allow businesses to accept credit card payments in exchange for a processing fee. No matter what credit card processing company you use, there is a processing fee involved in accepting credit. However, with free credit card processing companies, that fee is offloaded onto your customers rather than coming out of your own pocket. So, it's not free in the sense that it has no cost – you're just not the one paying it. Additionally, companies that claim to offer free credit card processing still charge their clients a fee for their software and services, so no matter how you look at it, it's not free.
Why is there a cost associated with processing credit card payments?
The interchange fee (sometimes referred to as a swipe fee by retailers) is what credit card companies charge merchants or customers in exchange for offering them purchases on credit. When people use credit cards to buy things, a financial institution has to offer the money upfront before it is paid back. Credit card companies make money, despite fronting money to card users, both by charging interest on credit card balances and by charging interchange fees on credit card payments.
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How much is an interchange fee on a card purchase?
Interchange fees vary by creditor, which is why some cards are more widely accepted than others. Most credit card payment fees are 0.05% to 2% of the purchase, and debit cards generally have a lower interchange rate than credit cards.
What is credit card surcharging?
Sometimes referred to as a checkout fee, surcharging is the practice of passing on credit card processing fees to your customers, rather than paying the costs yourself. Every time a customer uses a credit card, a fee is incurred. That fee is typically paid by the merchant, except in cases of surcharging, where the customer pays the fee.
Is it legal to pass credit card fees on to your customers?
Not everywhere. Any form of merchant surcharging is illegal in California, Colorado, Connecticut, Kansas, Maine, Massachusetts, New York, Oklahoma and Texas. If you are not in the United States or some of your clients are international, you should consult an accountant or attorney regarding surcharging practices. Additionally, the way you surcharge customers and tell them about the surcharging impacts the legality of the practice, as does the way you offer discounts for cash-paying customers. Consult with a lawyer before instituting any surcharging practices, and keep in mind that laws are different for credit cards and debit cards (even if the debit card is being run as credit).
Do you have to tell customers about credit card surcharging?
Yes. Even if credit card surcharging is legal in your state, you must meet disclosure requirements. You may find examples of compliant signage from credit card companies or create your own, but to ensure your wording falls within the legal boundaries of what constitutes disclosure, you should consult with a lawyer or accountant.
Is charging customers a fee for using credit bad for business?
Surcharging your customers may or may not impact your business. Most consumers who use credit cards are unaware of interchange fees in general, since merchants usually pay these fees, so they may react negatively to an unexpected charge.
Researching the way your local competition handles credit card processing is a good place to start. If no one else in your industry uses surcharging, doing so may put you at a disadvantage. Most credit card companies discourage surcharging, even in places where it is legal, because they feel it disincentivizes the use of credit and punishes the consumer.
Is it legal to offer customers a discount for paying cash?
Offering a discount for paying in cash allows merchants to incentivize their customers not to use credit, but there are restrictions on how you can do it. It is legal to offer a discount to customers for paying cash, but it may violate the terms of certain credit providers if you do so by adding a fee to the cost of existing items and then deduct that fee for cash payers. Instead, you must price goods and services normally, without an added fee, and simply offer a discount for cash payers. It's a subtle difference, but in the world of credit card processing regulation, semantics matter.
Discounts for paying cash must also be printed on receipts given to customers for your program to comply with U.S. law. Consult with an attorney before starting a cash discount program.
Are credit card minimums legal?
Yes. Merchants may set a minimum credit card charge of up to $10. This only applies to credit cards, not to debit cards. Credit card minimums are a less harsh way to minimize the negative impact of credit card interchange fees.
Which companies offer free credit card processing?
There are no completely free credit card processing services. Some companies offer an entry-level software subscription for free, but the actual processing of credit payments still costs money. There are also third-party companies like SurchX that work with your primary credit card processing service to help you implement surcharging practices in compliance with current laws. For more information on the best credit card processors for small businesses, check out our independently reviewed guide.
Is there free credit card processing for nonprofits?
No. If you run a nonprofit and want to accept credit card transactions for donations, you will pay the same interchange rate as regular for-profit merchants. However, there are rewards point systems that allow cardholders to donate their credit card points to charities, and if they do, no credit card payment fee is charged.
What to consider when looking for a free credit card processor
Free credit card processing is rarely free. A customer likely pays the fees, which will be listed on their bills as surcharges. If you do work with a free credit card processor, there are a few things to look for before signing a contract.
First, check what type of payment terminals are available through the free credit card processor. Most companies provide either a virtual terminal or POS system. Depending on the equipment needed to process transactions, there may be a cost to own or rent the pieces. If you're processing all transactions virtually, you may be able to forgo equipment and only use an online payment portal.
Review all fees associated with the account. Find out every possible charge the processor will charge you. You also want to determine if you will pay a flat monthly rate for having an account with the company.