The Three Types of Extra Charges on Payments
While they might be used interchangeably, Service Fees, Convenience Fees, and Surcharging Fees have distinct applications, regulations, and best practices. Below is a breakdown of their core differences and when they should be used.
In Brief
Service Fee: Charged by specific industries (government, education, utilities) and must be applied to all payment methods equally. This fee is meant to cover administrative costs rather than card processing fees.
Convenience Fee: Charged for offering an alternative payment method outside standard business practices. For example, a fee may be applied if a business primarily accepts cash in-store but allows online card payments for customer convenience.
Surcharge Fee: Charged only on credit card payments to offset processing fees. Debit and prepaid cards cannot be surcharged under card network rules.
Diving Deeper
Service Fees: Designed for Regulated Industries
- Who Can Charge It? Only businesses within government, education, and select regulated industries.
- Which Payments Can Be Charged? Applied to all payment methods (credit cards, debit cards, ACH, etc.).
- Regulations: Card brands allow service fees, but businesses must ensure compliance within their specific industry category.
- Example: A public university charging a service fee for processing tuition payments online.
Convenience Fees: For Alternative Payment Methods
- Who Can Charge It? Any merchant offering an alternative payment channel (e.g., online, phone, kiosk payments vs. in-person transactions).
- Which Payments Can Be Charged? May be applied to credit, debit, or ACH transactions, depending on industry regulations.
- Regulations: Must be disclosed upfront and charged as a fixed or flat fee, rather than a percentage of the transaction.
- Example: A movie theater that traditionally sells tickets in person but charges a convenience fee for online ticket purchases.
Surcharges: Passing Processing Fees to Credit Card Users
- Who Can Charge It? Most businesses, except in states where it is restricted or prohibited.
- Which Payments Can Be Charged? Only credit card transactions (debit and prepaid cards are not eligible).
- Regulations:
- Merchants must notify Visa/Mastercard 30 days before implementation.
- The surcharge amount must be the lesser of the merchant’s actual processing cost or 3% (Mastercard) / 3% (Visa).
- Signage and clear disclosure at checkout are required.
- Example: A retail store adding a 3% surcharge to purchases made with a credit card but not applying the fee to cash payments.
Consider if You Should
Before implementing these fees, consider how they may impact your relationship with your payors. Unexpected fees can lead to dissatisfaction, increased customer inquiries, and even chargebacks. Ask yourself:
- Will this fee be perceived as fair by customers?
- Have I clearly disclosed the fee before the transaction?
- Is this the best way to offset processing costs without negatively impacting my brand?
- Could this lead to payors choosing alternative payment methods or providers?
Evaluating these factors will help ensure that your business maintains a positive payment experience while managing operational costs effectively.
Final Thought: Customer Experience is Key
Clear communication with customers is critical regardless of the fee type you implement. Unexpected fees can lead to chargebacks, complaints, and potential compliance issues. Always ensure that fees are disclosed before the transaction is completed and that they align with card brand and regulatory guidelines.
As your payments expert, Pay Theory can help you navigate through regulatory compliance. If you have any questions, contact your payments team at Pay Theory to walk you through a tailed experience build-out.
