What Is a Credit Card Surcharge? What New York Restaurants Need to Know

A five-year legal battle that has now ended gives New York City merchants the right to add a credit card surcharge to diner’s bills. Unsurprisingly, many restaurants see this as an opportunity to recover some of the costs imposed by credit card companies by charging their customers a surcharge.

But the reactions from the public have been mixed, which begs the question: Should you charge a credit card surcharge in your restaurant? 

This post will not only help you answer this question – even if your restaurant is outside New York City – but also sheds light on the following:

• What a credit card surcharge is 
• The details surrounding the New York credit card surcharge
• How restaurants are implementing this surcharge 
• How customers are reacting to it
• The legality of surcharges by state

Ready? Let’s jump in.

What Is a Credit Card Surcharge?

As a restaurateur, you’re charged credit card fees by your payment processor to offer customers the option to pay by card. These processing fees include an interchange and a brand fee, with the total cost being anywhere from 2 to 4% of each transaction.

A credit card surcharge, also known as a checkout fee, is an extra fee that merchants or restaurants charge their customers to recover these credit card transaction costs. How much you charge customers for this fee will depend on your payment processor’s pricing model, so be sure you fully understand all fees.

Related: For a deep dive on credit card processing fees, read Credit Card Processing Fees: How to Read Your Restaurant’s Monthly Statement. 

The New York Credit Card Surcharge: The Details

Following a motion brought forward in January 2019, New York merchants can now charge a credit card surcharge, subject to it being clearly displayed to customers.

This case dates back to 2013 where several businesses, led by Expressions Hair Design, filed a lawsuit in Federal Court. They asked that the state allow merchants to charge a surcharge, effectively challenging the ban on disclosing to customers how much merchants were paying for credit card transactions.

Although the Federal Court agreed with these merchants, the case eventually ended up in the Supreme Court in 2017. The Supreme Court decided the case was a regulation of commercial speech and so transferred it over to the New York State Court of Appeals. 

In October 2018, the Court of Appeals stated that as long as merchants listed the total price (including cents), they could legally call the difference between cash and card prices whatever they want – a cash discount, surcharge, and so on.

Fast forward a few months to the motion brought forward by the merchant plaintiffs and surcharges are effectively legal in New York.

How Restaurants Are Implementing The Surcharge

Now that surcharges are legal in New York, an increasing number of restaurants are adding them to each check. Although all these restaurants share the common goal of covering credit card fees, how they present these surcharges can vary from venue to venue.

Some restaurants are following the letter of the law, clearly displaying notices on windows and menus that detail the extra fees for credit card purchases and specify how much they will be. Others are charging high surcharges without notifying customers on any sign or menu, which is illegal. 

Then there are also those restaurants that:

• Include extra fees on receipts for customers paying via card, without adequately communicating these fees to customers before processing a transaction.
• View the new surcharge law as an opportunity to advertise a cash discount (i.e. regular price without the surcharge).
• Camouflage the surcharge as an “svc fee” or “non-cash adjustment.”
• Mention the surcharge in small print on the menu, so most customers don’t notice it.

How Customers Are Reacting to the Surcharge

Regardless of how restaurants are framing their new surcharge and presenting it to customers, these surcharges are unfamiliar to many diners and generally come as a surprise. Some customers are empathetic to the plight of restaurants who have to cope with the high credit card fees, but for the most part, customers remain unhappy about the surcharge.

They’re unhappy about an additional charge being added to their bill, or feel misled by restaurants that don’t communicate these fees upfront or include them in small print on the menu, so you barely notice them. Some customers also feel that it’s not their responsibility to pay for these charges.
As a result, many restaurants face negative reviews and complaints. Just consider the restaurant Spanglish NYC in Bayside. They received so many complaints that owner David Arias chose to discontinue the surcharge and offered discounts for those paying in cash instead.

So, Should You Offer a Credit Card Surcharge?

First things first, if you’re in a state where it’s unlawful to impose a surcharge on clients, then the decision to add a credit card surcharge is an easy one. Unless you want to face lawsuits or heavy penalties, you definitely should not implement a surcharge. Here are some states where offering credit card surcharges is illegal:

• Colorado
• Connecticut
• Kansas
• Massachusetts
• Oklahoma
• California
• Florida
• Texas

Take note that although it is illegal to offer surcharges in California, Florida, and Texas, “No-Surcharge” laws are being overturned, just like in New York. 

If you’re in a state where it’s legal to impose surcharges or the laws are changing, then your decision isn’t as clear cut. It’s not a choice we can make for you, but we can equip you with all the information you need to help you make an informed one – which starts with being fully aware of the pros and cons of offering a surcharge and exploring other options for covering these costs.

Understanding the Consequences of Offering a Surcharge

On the one hand, offering a credit card surcharge allows you to recover the credit card transaction costs you pay to payment processors. And let’s face it, these can be hefty, depending on your payment processor. For many restaurateurs, this is a strong reason to immediately implement a surcharge, realize an instant cost saving, and improve their bottom line.

On the other hand, implementing a surcharge could lead to unhappy customers, complaints, and lost business. Although you can’t put an exact number on how much business you could lose, the lost business can potentially outweigh the cost savings of a surcharge. It’s crucial that you fully understand this risk when deciding if you want to implement a  surcharge.

If you decide that a surcharge is right for your business, you’ll want to keep some important factors in mind beyond your decision.

Firstly, be upfront with your customers from the start – clearly communicate this surcharge on your menus, signage, and with your serving staff. Let’s face it, most of us aren’t happy with businesses when we feel they’re hiding something from us. Your customers are no different.

Secondly, you also need to be willing to acknowledge when the surcharge isn’t working and doing more harm than good and adjust, like David Arias did by discontinuing it.

Exploring Other Options Besides a Surcharge

There are also other ways to recoup your credit card transaction costs that, when used together, will help you save money without alienating guests:

• Specify a minimum purchase amount for credit card transactions to avoid paying exorbitant credit card fees
• Make sure your menu prices already factor in the surcharge. Calculate your costs of goods sold (COGs) and see if there is room to increase those prices to account for credit card fees on each check, while still remaining competitive. 
• Review and change your payment processor. Because surcharges originate from the problem of high credit card transaction fees, finding a different processor with a more reasonable pricing model can help you better manage these daily operating costs.

A Few Final Words on Credit Card Surcharges

Credit card transaction costs are part of running any restaurant. And while deciding to charge a surcharge is one way for you to recover this cost for your restaurant, it’s not a decision you should take lightly.

If you’re thinking about offering a surcharge in your restaurant, you need to make an informed decision. Make sure you understand the laws in your state, review both the pros and cons, and investigate other available options to make up the fees.