By Charla Wallace June 4, 2025
As businesses search for ways to protect their profit margins, many are exploring no-fee payment models as a way to minimize or eliminate credit card processing costs. These models shift the responsibility of processing fees from merchants to consumers. While the financial appeal is strong, legal considerations surrounding these models are complex and often misunderstood. If not properly implemented, a no-fee payment model can expose a business to regulatory fines, customer disputes, and reputational damage.
What is a No-Fee Payment Model?
A no-fee payment model refers to a structure where the merchant avoids paying credit card processing fees by passing those costs on to the customer. This is often done through a surcharge, where a fee is added when a customer chooses to pay with a credit card. For example, if a customer buys a product worth $100, a surcharge of 3 percent would make the final total $103.
Cash Discount vs. Credit Card Surcharge
It is important to distinguish between a cash discount and a credit card surcharge. A cash discount offers a lower price for customers paying with cash or debit cards. A surcharge adds a fee for credit card use. The difference in implementation matters because they are governed by different legal frameworks and card network rules.
While both aim to recover processing costs, the laws surrounding them differ. Surcharging is heavily regulated, while cash discounts are more widely accepted. Businesses must be careful to label and apply these programs correctly to avoid non-compliance.
Federal Laws That Apply
At the federal level, there is no law outright banning surcharging. However, several federal consumer protection and pricing transparency laws apply to how surcharges must be disclosed and implemented.
Truth in Lending Act
The Truth in Lending Act (TILA) is designed to promote transparency in lending and credit-related transactions. Although it primarily focuses on financial institutions, parts of the Act apply to merchants as well. When surcharges are added to credit card payments, they must be disclosed clearly and upfront. The customer should never be surprised by the fee at the time of payment.
Dodd-Frank Act
The Dodd-Frank Act includes provisions that allow businesses to offer discounts for certain payment methods, including cash. This means that a cash discount program is permitted under federal law, as long as the posted price reflects the card price and the discount is applied at checkout for non-card payments.
However, this law does not give merchants unlimited flexibility. They must still follow card network rules and state-level restrictions when applying surcharges.
State-Level Legal Restrictions
While federal law allows surcharging under certain conditions, individual states have the authority to regulate or prohibit these practices. Some states have banned credit card surcharges entirely, while others have imposed strict requirements.
States That Prohibit Surcharging
As of recent updates, states such as Connecticut and Massachusetts prohibit credit card surcharges outright. In these states, businesses cannot legally add a fee for credit card usage, even if the customer is notified in advance.
Other states have had legal disputes around the issue. For example, New York had a ban that was modified after a court ruling, allowing surcharges under strict disclosure conditions. Businesses in such states must stay current with legal changes to avoid violations.
States With Disclosure Rules
Some states permit surcharging but require detailed disclosure. For instance, businesses may be required to:
- Display signage at the entrance and point of sale
- Show the surcharge amount before the transaction is completed
- Limit the surcharge to the actual cost of processing, often capped at 4 percent
Failure to meet these requirements can lead to penalties, consumer complaints, or lawsuits. It’s crucial for businesses to research and understand the regulations specific to their state.
Card Network Rules and Agreements
In addition to government regulations, businesses must comply with the rules of the card networks they accept, such as Visa, Mastercard, American Express, and Discover. Each network has its own policies on surcharges.
Visa and Mastercard Guidelines
Visa and Mastercard both allow surcharging under specific conditions. These include:
- The surcharge must not exceed the cost of acceptance (typically capped at 4 percent)
- Merchants must notify Visa and Mastercard at least 30 days before implementing a surcharge
- Merchants must also notify their acquiring bank
- The surcharge must be clearly disclosed at the point of entry and point of sale
- The receipt must show the amount of the surcharge
These rules are strictly enforced. If a merchant violates them, it may face fines, increased transaction costs, or even termination of their merchant account.
American Express and Discover
American Express permits surcharging only if it is applied equally to all card brands. A business cannot surcharge only AmEx transactions while exempting Visa or Mastercard. Discover has similar rules and requires clear disclosure to cardholders.
Non-compliance with any of these guidelines can result in financial penalties or the loss of merchant privileges with the respective network.
Disclosure Requirements and Best Practices
Legal compliance in a no-fee model heavily depends on how well the merchant discloses the fee to the customer. Transparency is not just ethical but legally required under most regulations.
Display Notices Clearly
Businesses must display signs at the store entrance, at the register, and on the website if applicable. These signs should inform customers that a surcharge applies to credit card payments and state the exact percentage or dollar amount.
For e-commerce transactions, the surcharge must be visible before the customer checks out. It cannot be added silently at the final payment screen.
Provide Receipt Transparency
The receipt should show both the base price and the surcharge separately. This ensures the customer knows exactly what they are paying for and why. Omitting this detail can be grounds for disputes or chargebacks.
Train Staff and Stay Consistent
All employees handling payments should be trained to explain the surcharge accurately and professionally. Consistency in communication prevents customer confusion and protects the business from complaints or legal action.
Compliance Pitfalls to Avoid
Even well-meaning businesses can fall into legal traps if they fail to follow the rules precisely. Some common mistakes include:
Mislabeling the Program
Calling a surcharge a “cash discount” when it is not structured that way can create legal issues. A true cash discount program must show the higher card price upfront and apply a discount at the point of sale for cash payments. If this is not the case, the business may be in violation of surcharge laws while thinking they are compliant.
Charging More Than the Legal Limit
Even if a state allows surcharging, there is typically a cap on how much can be charged. Going over the 4 percent limit, or charging more than the actual cost of acceptance, is a direct violation of both state law and card network rules.
Failing to Notify Card Networks
Many businesses overlook the requirement to notify Visa, Mastercard, or other networks before implementing a surcharge. Skipping this step can result in the merchant account being flagged for non-compliance, leading to fees or cancellation.
Industry-Specific Legal Challenges
The legal considerations of no-fee models also vary by industry. Some sectors are more heavily regulated than others, which can affect how payment models are implemented.
Healthcare and Medical Services
Medical providers must be extremely careful when applying surcharges. Patient protection laws, healthcare privacy regulations, and insurance billing rules can complicate matters. Transparency and billing accuracy are critical in this sector.
Nonprofits and Educational Institutions
While some nonprofits consider no-fee models to cover donation processing fees, they must comply with both payment regulations and nonprofit disclosure rules. Additionally, if the surcharge discourages donations, it could have unintended consequences.
Government and Utility Payments
Entities that collect government fees or utility payments may be subject to special laws that prohibit or restrict surcharges. These vary by municipality and should be reviewed with legal counsel before implementing any changes.
Working with a Compliant Payment Processor
One of the easiest ways to stay legally compliant is to work with a reputable payment processor that understands the complexities of no-fee models. Not all processors offer surcharge or cash discount solutions, and those that do should provide legal guidance as part of their service.
Questions to Ask a Provider
Before selecting a provider, businesses should ask:
- Do you offer surcharge-compliant solutions?
- How do you help businesses follow state and card network rules?
- Do you assist with required notifications to Visa or Mastercard?
- Can your system print receipts showing the surcharge breakdown?
If a provider cannot answer these questions clearly, it may be a red flag. Legal compliance should never be treated as an afterthought in a no-fee model.
Legal Resources and Support
For businesses that want to dig deeper into the laws around surcharging, several resources can be helpful:
- State attorney general websites often list current rules on credit card fees
- The websites for Visa, Mastercard, AmEx, and Discover provide official guidance
- Legal counsel familiar with commercial transactions and consumer protection laws can offer tailored advice
Businesses should also subscribe to regulatory updates to stay informed about any legal changes that might affect their operations.
Conclusion
No-fee payment models can be a powerful way for businesses to protect their revenue, but they come with serious legal responsibilities. From federal regulations and state laws to card network agreements, businesses must navigate a layered and often confusing landscape. The key to success lies in full transparency, accurate labeling, and a deep understanding of the rules that govern your industry and location.
By working with compliant payment providers and staying updated on legal requirements, businesses can safely implement no-fee models while preserving customer trust and avoiding penalties. Whether you’re just exploring the idea or ready to roll it out, take the time to ensure your approach is legally sound. It’s not just about saving money but doing so in a way that builds lasting trust and business resilience.