Credit card surcharge: Can shops legally charge you 2% extra? Know the rules

The merchant may call it a processing fee, card surcharge, or convenience fee, but have you ever thought that a merchant can legally impose this cost on you just because you chose to pay by credit card?

Credit card surcharges are a point of confusion for most credit card holders and in that case, if a merchant asks you to pay an extra 2% for using your credit card, should you accept it, challenge it, or report it?

Here is what consumers need to know about credit card surcharges, merchant charges and the rules surrounding card payments in India.

Can a shop legally charge a customer an additional fee for paying by credit card?

RBI does not prescribe a specific cap on surcharges for credit card transactions. Its restriction on passing on Merchant Discount Rate (MDR) to customers applies specifically to debit-card transactions. 

MDR is the fee charged to merchants for accepting digital payments through debit cards, credit cards, net banking, and digital wallets. Merchant Discount Rate (MDR) for merchants typically varies between 2-3%.

Merchants generally agree to the applicable MDR with their bank or payment service provider and need to set up the necessary payment acceptance facility before they can process digital transactions.

“For credit cards, whether a merchant can levy an additional charge will depend on its card acceptance arrangements and other applicable rules. In any case, customers should be clearly informed about the additional charge before making the payment,” said Adhil Shetty, CEO, BankBazaar. 

Does the rule apply the same for debit cards?

The Reserve Bank of India (RBI), in its December 2017 directions on the rationalisation of Merchant Discount Rate (MDR) for debit card transactions, set maximum MDR limits that banks and authorised card networks could charge merchants. 

For small merchants with turnover of up to Rs 20 lakh in the previous financial year, the maximum MDR for physical point-of-sale (POS) and online card transactions was capped at 0.40% of the transaction value, subject to a maximum of Rs 200 per transaction. For QR-code-based card transactions, the MDR was capped at 0.30%, again with a maximum charge of Rs 200 per transaction. 

For other merchants with turnover exceeding Rs 20 lakh, the maximum MDR was set at 0.90% for physical POS and online card transactions, with a cap of Rs 1,000 per transaction. For QR-code-based card transactions, the maximum MDR was 0.80%, subject to a Rs 1,000 per-transaction cap.

Importantly, the RBI specifically directed banks to ensure that merchants do not pass on MDR charges to customers when accepting debit card payments. The instructions came into effect on January 1, 2018. 

What is the difference between a credit card surcharge, convenience fee, service fee, and MDR?

MDR is the fee a merchant pays its acquiring bank for accepting card payments, while a surcharge is an additional amount charged to the customer for using a particular payment method. 

RBI defines a convenience fee as a charge for using a card as an alternative payment method where cards are not ordinarily accepted and requires it to be disclosed transparently before the transaction. 

Service fee is not specifically defined by RBI and can mean different things depending on the business.

Does the merchant have to disclose the surcharge before the customer makes the payment?

RBI specifically requires convenience fees, where charged, to be disclosed transparently before the transaction. 

“For a credit card surcharge at a physical shop, RBI does not lay down a specific format for how it should be disclosed. The key point is that the customer should know about the additional charge before paying, rather than discovering it after the transaction,” stated Shetty.  

A clear disclosure at the point of sale would therefore be the better approach.

What should a customer do if a merchant insists on charging 2% extra?

Ask for clarification when you spot an additional charge and keep the bill or payment record. 

If you have concerns about how the charge has been applied, raise the matter with your card issuer. 

If the issuer does not respond within the prescribed period or their response is unsatisfactory, you can escalate it through the RBI Ombudsman’s Complaint Management System, which provides the formal escalation route.

Since 2021, banking, NBFC, and payment-system complaints have been consolidated under the Reserve Bank – Integrated Ombudsman Scheme, 2021. 

There is no limit on the dispute amount that can be taken to the RBI Ombudsman. However, compensation for the actual financial loss can be up to Rs 30 lakh. The Ombudsman can also award up to Rs 3 lakh for the complainant’s time, expenses, harassment or mental distress.

Disclaimer: This article is for informational purposes only and should not be construed as investment, financial, tax, or legal advice. Any illustrations, examples, or return projections used in this article are for explanatory purposes only and do not guarantee actual investment outcomes. The views and opinions expressed by experts quoted in this article are their own and should not be considered investment recommendations. Readers should consult a qualified professional before making any financial decisions. 

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