Merchants, including restaurants, are allowed to encourage customers to pay with cash over card — that can look like added fees, cash discounts or different prices.
The latest data on the most popular forms of payment at restaurants indicates credit cards are becoming an increasingly appealing choice for getting restaurant meals. According to an April 2020 survey from Bankrate, customers relied on credit cards for over half of their takeout orders. In comparison, that survey found customers used cash in only 17% of restaurant orders.
Sometimes, restaurants charge different prices for items depending on whether you pay cash or credit. Linda emailed VERIFY to ask if restaurants can legally charge more for using credit cards.
Can a restaurant charge a customer different prices for credit cards and cash payments?
Yes, a restaurant can charge a customer different prices for using credit cards and cash payments.
WHAT WE FOUND
In every state, it’s legal for restaurants to charge customers more for purchases made with credit cards than purchases made with cash. In most states, they can accomplish this with an added fee for credit card purchases. In some states, restaurants can only do this by offering a discount for purchases made with cash or other payment methods.
A fee applied to credit card purchases is called a surcharge. A restaurant must apply this fee equally to all credit cards and must clearly disclose the fee before the customer makes their payment.
The U.S. General Services Administration (GSA) explains that a 2013 settlement between a class of retailers and the credit card networks Visa and MasterCard permitted merchants to apply surcharges on credit card transactions, except where states have prohibited surcharges by law.
Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma, Texas and Utah prohibit surcharges by law, GSA says. Those states account for 40% of the U.S. population.
However, it is legal in every state for merchants to offer a “cash discount.” For example, a restaurant menu might include a note that says there’s a 3% discount for all purchases using cash. Alternatively, a restaurant might list two prices on its menu: one price for purchases made with a card, and another price for purchases made with cash.
Although cash discounts serve the same purpose as surcharges, cash discounts are legal even in the 10 states that forbid surcharges. The state of California even permits merchants to include debit card and check purchases in this discount. Much like merchants have to inform consumers of surcharges before they make their purchase, merchants also must always inform consumers of the existence of these cash discounts before their purchase.
The National Merchant Association (NMA) explains that the difference between a surcharge and a cash discount essentially comes down to advertising. A merchant who applies a credit card surcharge can advertise lower prices that exclude the charge, while a merchant using a cash discount must advertise higher prices that include the higher price for using a card. Alternatively, merchants can simply advertise two different prices: a cash price and a credit card price.
Merchants apply these fees or discounts because they must pay a processing fee for every card payment they accept. Credit card payments come with far higher processing fees than debit card payments. Surcharging is a way to pass on this fee to the consumer, and in the case of discounting, the merchant is passing on its savings from avoiding this processing fee to the consumer.
In 2013, Visa and MasterCard settled a U.S. Justice Department lawsuit that claimed Visa, MasterCard and American Express were engaging in anti-competitive practices by forbidding merchants who accept their credit cards from encouraging consumers to use payment methods that cost less to process. American Express fought the lawsuit in court, but the Justice Department eventually won the suit.
Merchants sign contracts with card payment networks to accept and process payments customers make using those networks’ cards. Previously, the card networks forced merchants to treat every payment method the same, even though merchants made less money for every credit card purchase as a result of the high fees. Many of the rules regarding surcharges are still set by these contracts — for example, Visa and MasterCard explicitly forbid their merchants from surcharging debit cards.
The NMA says merchants aren’t allowed to apply surcharges to debit card transactions across the board, but it adds that debit cards can be excluded from discounts for cheaper payment methods. That means a restaurant is allowed to offer a cash discount without extending that discount to debit cards.
Even in states that forbid surcharges, some merchants may have the ability to charge convenience fees for payments considered “nonstandard” for their business. The credit card networks typically restrict these types of fees to a few specific situations, and they cannot be applied to the same purchase as a surcharge.
Surcharges and convenience fees can be no higher than the cost of the processing fee, and most states apply similar restrictions to cash discounts.