Credit Card Surcharges Surge: Why 34% of Small Businesses Are Now Charging Extra Fees

Bottom Line Up Front: Small businesses are increasingly passing credit card processing costs to customers, with 34% now adding surcharges according to J.D. Power’s latest study. However, this trend comes with significant risks—41% of consumers avoid businesses that charge these fees, and merchant satisfaction drops 24 points when surcharges are implemented.

Credit card surcharges have become a critical business decision for merchants nationwide. Rising processing costs and economic pressures are driving more small businesses to add extra fees when customers pay with plastic.

The practice affects both business operations and customer relationships. Understanding the legal requirements, consumer reactions, and financial implications is essential for any business considering this approach.

New Study Reveals Widespread Adoption of Credit Card Surcharges

A groundbreaking J.D. Power study released in January 2025 found that 34% of merchants are now adding surcharges for customer purchases made using credit cards. This represents a significant shift in how small businesses manage payment processing costs.

The comprehensive study surveyed 3,841 small business customers of merchant services providers between August and October 2024. The research measured satisfaction across six key dimensions: advice and guidance, cost of processing payments, data security, account management, payment processing, and technology quality.

Key findings from the study include:

• Merchant satisfaction drops significantly when surcharges are implemented
• Consumer behavior changes dramatically when fees are added
• Economic pressures are the primary driver behind surcharge adoption
• Payment method preferences are shifting in response to these fees

“Small business owners are under pressure from both technological and economic perspectives, and as they continue to expand the number and type of payment options they accept, many are seeking more support and guidance from their merchant services providers and passing along their processing costs to customers,” explained John Cabell, managing director of payments intelligence at J.D. Power.

The Hidden Cost: Customer Satisfaction Plummets with Surcharges

Implementing credit card surcharges creates a direct trade-off between cost recovery and customer satisfaction. The J.D. Power study revealed that satisfaction with payment processing costs among small businesses implementing credit card surcharges is 24 points lower (on a 1,000-point scale) than among those that do not add surcharges.

This satisfaction gap reflects the complexity and challenges businesses face when managing surcharge programs. Merchants must navigate legal compliance, customer communication, and operational changes while trying to protect their profit margins.

The customer impact is equally significant. Research shows that 41% of credit card users have decided not to use a card payment method at a business because of a surcharge. This behavioral change can directly affect sales volume and customer retention.

Additional consumer research supports these findings. Independent studies indicate that 71% of small business customers try to avoid companies that charge fees for credit card use. This avoidance behavior can significantly impact long-term business growth and customer loyalty.

Economic Pressures Drive Surcharge Adoption

Small businesses are facing mounting financial challenges that make surcharges increasingly attractive. The J.D. Power study found that fewer than half (45%) of small business owners say their company is better off financially than it was a year ago, down from 48% a year ago.

Processing fees continue to rise as payment method usage expands. The study revealed that 65% of small business annual sales revenue was processed by merchant services providers in 2025, up from 62% in 2024. This increased reliance on payment processing directly correlates with higher fee burdens.

Several factors contribute to surcharge adoption:

• Rising interchange fees from credit card networks
• Inflationary pressures on business operations
• Increased digital payment adoption by consumers
• Competitive pressure to maintain profit margins
• Limited alternatives for cost management

“Card-transaction costs, inflationary pressures, and small-business economic concerns together are the drivers of surcharges,” noted John Cabell from J.D. Power.

The structure of payment processing also influences surcharge decisions. Research indicates that pricing based on a flat rate per transaction prompts significantly more merchants to add surcharges for credit cards. Newer and smaller merchants are more likely to pass along these costs to their customers.

Understanding the Legal Landscape of Credit Card Surcharges

Credit card surcharge legality varies dramatically across the United States. While merchants in 37 states can likely surcharge credit card transactions without breaking the law, several states maintain restrictions or outright bans.

States that currently prohibit surcharges include:

• California (effective July 2024 under Senate Bill 478)
• Connecticut
• Maine
• Massachusetts

States with specific restrictions include:

• Colorado (2% maximum surcharge)
• New York (surcharges cannot exceed merchant’s processing cost)
• Nevada (must not exceed actual processing costs)
• Minnesota (mandatory fees must be included in advertised prices unless avoidable, effective January 2025)

Federal regulations cap surcharges at 4% for most card networks, with Visa limiting surcharges to 3% as of April 2023. Non-compliance can result in significant penalties, with fines ranging from $50,000 to $1 million according to processor warnings issued in 2023.

Compliance requirements typically include:

• 30-day advance notice to payment processors
• Clear disclosure at point of sale
• Separate line items on receipts
• Proper signage and customer notification
• Adherence to state-specific regulations

Consumer Behavior Shifts in Response to Surcharges

The implementation of credit card surcharges creates measurable changes in consumer payment behavior. Research from Ipsos Channel Management found that firms implementing surcharges see approximately a 10% fall in same-store debit and credit sales as consumers modify their buying patterns.

Common consumer responses to surcharges include:

• 17% stop shopping at places that surcharge credit cards
• 20% shift to cash payments
• 14% reduce spending on both debit and credit cards
• 71% of cardholders who use alternative payment methods to avoid surcharges opt for cash

Payment method substitution is common when surcharges are present. Forty percent of credit card holders use debit cards as an alternative to avoid surcharges, while 22% use PayPal and 19% use digital wallets.

Interestingly, consumer attitudes often soften once they experience surcharges firsthand. PYMNTS research indicates that while cardholders typically object to surcharges hypothetically, “consumers will more likely pay the surcharge than refuse to pay it when the time comes.”

The Current Payment Processing Landscape

Credit and debit card acceptance remains nearly universal among small businesses. The J.D. Power study found that 96% of small businesses accept debit and credit cards, making them the most popular point-of-sale payment methods.

Payment method acceptance rates include:

• Digital wallets: 90%
• Cash: 81%
• Check: 60%
• Buy Now, Pay Later (BNPL): 52%
• Cryptocurrency: 15% (down from 20% in 2024)

The most widely accepted payment brands demonstrate the dominance of traditional card networks. Visa leads at 87% acceptance, followed by Mastercard at 82%, PayPal at 73%, American Express at 69%, Apple Pay at 65%, and Discover at 61%.

Growth trends show increasing adoption of newer payment methods. Cash App Pay, Venmo, Apple Pay, Visa, Discover, and Samsung Pay all showed significant gains in merchant acceptance during 2024.

Alternatives to Credit Card Surcharges

Businesses concerned about customer satisfaction can explore several alternatives to surcharges while still managing processing costs effectively.

Cash discount programs offer lower prices for cash payments rather than adding fees for card use. This approach often generates less negative customer sentiment while achieving similar cost savings.

Operational efficiency improvements can offset processing fees through reduced overhead costs. Streamlining inventory management, reducing waste, and improving customer service can enhance profitability without additional fees.

Payment processor optimization involves negotiating better rates or switching to providers with more favorable pricing structures. Processors with interchange pricing models can be particularly effective for high-volume businesses.

Price adjustment strategies incorporate processing costs into base pricing rather than adding separate fees. While this approach may result in slightly higher overall prices, it avoids the negative perception associated with surcharges.

Service fee implementation involves adding small fees to all transactions rather than targeting specific payment methods. This approach can be more palatable to customers while still recovering costs.

Making the Right Decision for Your Business

The decision to implement credit card surcharges requires careful consideration of multiple factors beyond simple cost recovery. Businesses must weigh financial benefits against potential customer loss and operational complexity.

Key considerations include:

• Customer demographics and preferences – Understanding your customer base’s payment habits and price sensitivity
• Competitive landscape – Analyzing whether competitors are surcharging and how it affects market positioning
• Legal compliance requirements – Ensuring full understanding of applicable state and federal regulations
• Implementation costs – Factoring in system changes, signage, and training requirements
• Long-term customer relationships – Evaluating the impact on customer loyalty and retention

Research from Ipsos Channel Management suggests that “surcharging costs the average merchant more in lost sales than they recoup in surcharge fees,” highlighting the importance of comprehensive analysis before implementation.

Success factors for businesses that do implement surcharges:

• Clear, upfront communication about fees
• Excellent customer service to offset negative perceptions
• Competitive pricing that remains attractive even with surcharges
• Multiple payment options to give customers alternatives
• Strong value proposition that justifies the convenience fee

The Future of Payment Processing and Surcharges

Credit card surcharging is likely to remain a contentious issue as businesses balance cost management with customer satisfaction. Economic pressures and rising processing fees suggest continued growth in surcharge adoption, particularly among smaller merchants with limited bargaining power.

Regulatory developments will play a crucial role in shaping the landscape. Recent changes in states like California and Minnesota demonstrate ongoing legislative attention to consumer protection in payment processing.

Technology innovations may provide new solutions for managing processing costs without traditional surcharges. The growth of alternative payment methods, real-time payments, and digital currencies could offer merchants and consumers more cost-effective options.

Trends to watch include:

• Additional state-level surcharge regulations
• Credit card network policy changes
• Consumer payment method preferences evolution
• Alternative payment technology adoption
• Economic factors affecting small business operations

The key for businesses is staying informed about legal requirements, understanding customer preferences, and carefully evaluating the total cost of different approaches to payment processing cost management.

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Ready to optimize your payment processing strategy? Consider all factors carefully, consult with legal advisors about compliance requirements, and evaluate alternatives that align with your business goals and customer expectations. The right approach depends on your specific situation, but understanding the full landscape helps ensure you make the best decision for long-term success.