Guide to Credit Card Surcharging Laws in Alabama for MSPs

In Alabama, credit card surcharging is permitted, as it is in most U.S. states. However, there are federal and state regulations businesses must carefully follow if they plan to do so. In addition, companies need to adhere to surcharging guidelines set by card networks (Visa and MasterCard) as well.

Credit card surcharging can be a powerful tool for Alabama MSPs who want to pass on the costs of processing credit cards to clients. 

However, to do so, they must carefully follow Alabama surcharging laws, which this article dives into. 

This guide summarizes Alabama's credit card surcharging laws, offers valuable advice on how MSPs can start surcharging, and explains how an automated payment solution helps simplify this process. 

‍Disclaimer: This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for, legal advice. Conduct thorough due diligence and consult with a qualified legal professional to address specific questions related to your MSP.

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What is Credit Card Surcharging for MSPs in Alabama?

Credit card surcharging refers to one of several ways to pass on the costs associated with accepting a credit card payment to the customer instead of paying these costs yourself.

Credit card processing costs can add up and eat into an MSP’s profit margins, so the ability to surcharge a fee is understandably appealing.

MSPs, in particular, tend to have many recurring payments and complex billing associated with their operations. Surcharging can help manage these additional costs.

Surcharging credit card transactions can offset costs for the MSP, and passing along a portion of credit card processing fees to clients helps protect your margins. 

Here is how it might work.

Suppose you bill a client for $10,000 with a 3% surcharge fee, so their invoice total is $10,300. 

You also pay an average credit card processing fee of 3.0% per transaction. That adds up to $300 in credit card fees on that transaction alone. 

With the 3% surcharge, you recoup the entire cost of the credit card processing fees. 

Considering that $300 a month is $3,600 in annual credit card processing fees you’d otherwise be paying, this is a significant financial benefit for your MSP—not to mention how much these numbers add up with multiple clients. 

However, your clients might appreciate you passing only some of the processing fee to them. 

In that case, you could apply a lower surcharge, covering a portion of the fees while absorbing the rest. 

For example, you could pass 1% of credit card processing fees to clients while you pay the remaining 2.5%. 

In this case, you would recover $100 monthly ($1,200 annually) from the surcharge, which is still considerable savings. 

This approach strikes a balance between cost recovery and maintaining strong client relationships by not imposing the entire burden of credit card fees on them.

Understanding Credit Card Surcharging Laws in Alabama

As of October 2024, no known state laws or regulations prohibit surcharges in Alabama. 

In Alabama and every other state that permits it, surcharging only applies to credit card transactions. 

Debit and prepaid card transactions are exempt from surcharges, even if the processor codes them as credit transactions. 

In other words, surcharging debit cards is prohibited under the Durbin Amendment of the Dodd-Frank Wall Street Reform and Consumer Protection Act. 

We recommend consulting with a lawyer or qualified legal professional if you are unsure of your surcharging options in Alabama.

Surcharges must also be disclosed to customers before completing a transaction. 

MSPs must clearly state any surcharge on invoices or receipts so clients know the additional fee. 

MSPs can navigate this rule by ensuring their invoicing practices include clear disclosure of surcharge practices. 

This includes specifying the surcharge percentage and amount on each invoice and providing upfront communication about any fees during the billing process.

Implementing Credit Card Surcharging for Alabama MSPs

While implementing surcharging fees can boost an MSP’s bottom line, clients must understand the reasons for the surcharge to preserve trust and transparency. 

Further, they must be implemented thoughtfully to avoid negative consequences. 

According to survey data from PYMNTS, nearly three-quarters of respondents would be less likely to pay with credit cards if a surcharge is charged. Further, 40% would look for another merchant that does not charge them. 

Finding the right balance between overcharging and undercharging is crucial, or client relationships are at risk. 

Here are four best practices to successfully implement credit card surcharging.

Step 1: Establish a Clear Surcharge Policy and Structure

MSPs must first develop a surcharge policy that defines when and how a surcharge will be applied. 

The policy must comply with Alabama and federally mandated guidelines and card brand surcharging guidelines. 

These guidelines dictate how much a surcharge can be applied, when, and to which credit card transactions it will be applied. 

MSPs should make that policy available to clients to prevent ambiguity or misunderstanding.

Typically, the surcharge is a percentage of the transactional amount, but it can also be a set fee or based on a tiered system.

Here are examples of each surcharge structure:

1. Fixed Percentage Surcharge:

An MSP implements a 3% surcharge for all credit card transactions.

‍Example: You invoice a client for $5,000 in monthly services. The invoice includes a line that lists and calculates the 3% surcharge: $150, bringing the total to $5,150.

2. Tiered Surcharge System:

An MSP's surcharge rates depend on the transaction size: 2% for all transactions below $2,000 and 3% for all transactions over $2,000).

‍Example: A $1,500 invoice would include a $30 surcharge (2%); a $3,000 invoice would include a $90 surcharge (3%).

Step 2: Notify Credit Card Institutions and Clients

Before imposing surcharges, MSPs must inform their clients and any relevant credit card brand (such as MasterCard or Visa). 

Credit card brands have detailed rules and timelines for surcharging, and 30 days notice is required by most before you begin implementing these charges.

For example, according to Visa:

“U.S. merchants must first notify Visa and their acquirer of their intent to surcharge at least 30 days before implementing surcharging. Merchants can submit a notification form to Visa.”

Communicate any surcharges in contracts, service agreements, and invoices upfront so your clients aren’t surprised by additional charges on their invoices. 

This step is essential not only for compliance purposes but also to prevent payment disputes and chargebacks. 

Suppose a client expects to pay $5,000 but sees they have been charged an additional $150 (for a 3% surcharge fee). 

Assuming this was a mistake or a fraudulent transaction, they may dispute the charge with their card-issuing bank. 

If you had not disclosed this surcharge beforehand, you risk losing the surcharge amount and being responsible for chargeback fees and associated chargeback arbitration costs.

According to Swipesum, the average cost of a chargeback for a business is $190 per dispute. 

While not all chargebacks are caused by undisclosed surcharges, it is still worth avoiding these and other disputes however possible.

Step 3: Update Invoicing Systems

When implementing surcharges for the first time, you must adjust how you create invoices. For example, you should now include surcharges as individual line items. 

In doing so, you ensure clients can see exactly how much of their bill is the surcharge and why you are charging it. Again, this helps avoid confusion, disputes, and chargebacks.

‍FlexPoint’s automated billing and payment solutions make this easier by calculating and displaying invoice surcharge costs.

Step 4: Monitor and Review Compliance

Lastly, MSPs should periodically review their surcharging practices to ensure continued compliance with state and federal laws.

These are all essential steps, including periodically reviewing surcharge rates, requesting client feedback, and considering changes to the law or other regulations that could affect surcharging. 

For example, Visa lowered its surcharging cap to 3%. 

The surcharging cap for Mastercard is 4%. However, this only applies to merchants whose cost of Mastercard acceptance is greater than 4%.

As Mastercard explains: 

“If a merchant’s merchant discount rate for Mastercard credit cards is 2.50%, the cap on the surcharge that this merchant may charge a consumer is 2.50%, not 4%. 

The 4% cap only becomes relevant in the rare instances where a merchant is paying more than 4% for Mastercard acceptance.”

This demonstrates the need for MSPs to stay updated on changes that may affect their ability to charge fees and the specific aspects of each payment network's rules. 

Considering the surcharge that MSPs can pass on to their clients depending on the merchant discount rate and individual network caps, they must take care to ensure compliance and accurate fee management.

For instance, when Visa adjusted its surcharge cap, many MSPs had to update their systems to ensure they stayed within the allowed 3% limit. 

Similarly, Mastercard’s structure requires MSPs to closely monitor the costs merchants incur. Otherwise, they risk surcharging above the allowable threshold, which can vary based on the specific rates merchants pay.

The Role of FlexPoint in Streamlining Credit Card Surcharging

As MSPs’ operations often involve a wide range of transactions, credit card processing fees become challenging to manage. Recurring payments and large transaction volumes can significantly reduce profits.

Fortunately, FlexPoint’s MSP-specific payment automation software offers features and plans specifically designed to address these challenges.

Payment Processing Plans

The first of FlexPoint’s two payment processing plans is Interchange+. 

Priced to be transparent and cost-effective, Interchange+ has a tiered rate structure that adjusts your pricing when you run cards with different interchange rates. 

This allows you to benefit from the lower interchange rates that cards like Discover or certain debit cards provide. 

By contrast, premium cards such as American Express or high-reward credit cards will have a higher processing fee, as they also have higher interchange rates.

The pricing for this plan varies depending on the type of card (e.g., American Express comes with a higher merchant fee than MasterCard). 

With Interchange+, your processing costs will range from under 2% for most debit card transactions to around 3.5% for premium credit cards. 

This plan is recommended for MSPs who do not want to implement client surcharges and will cover these costs themselves. 

The second plan is Customer Surcharge, where MSPs can charge a flat percentage surcharge on every credit card transaction. This allows MSPs to pass the processing fees to end clients, cutting overhead. 

In this case, you will not pay credit card processing fees. 

Many MSPs also appreciate the consistency and predictability of having a flat rate for every credit card transaction.

Alternatively, MSPs can split the fees with the client, allowing them to balance client satisfaction and reduced processing costs.

How FlexPoint Enhances Surcharging Compliance and Transparency

FlexPoint automates surcharging and brings it into compliance with Alabama’s laws and federal regulations, imposing the proper percentage and making sure the surcharge never exceeds the legal limits (such as the federal 4% cap). 

With FlexPoint, invoicing is unambiguous, keeping clients happy and eliminating disputes. 

For example, if the client gets an invoice for $10,000 with a 3% surcharge, the invoice accurately reflects the two amounts.

The invoice for that client might look like this:

FlexPoint’s Integration with MSP Tools for Seamless Billing

FlexPoint integrates with popular tools among MSPs, including QuickBooks Desktop, QuickBooks Online, Xero, ConnectWise, and SuperOps. This connectivity makes it easier for MSPs to manage their billing and payment processes.

These integrations allow MSPs to automate invoicing, billing, and reconciliation tasks, significantly reducing the administrative burden associated with manual financial management.

For example, MSPs using ConnectWise can sync payment data in real-time for more accurate cash flow management. They can also effortlessly track surcharges and other fees, ensuring financial records are always current.

‍FlexPoint also offers a client-facing branded client payment portal, where clients can view an itemized invoice and change their payment information.

Ultimately, this leads to less payment friction, including that which is caused by surcharging.

Offering Flexibility in Surcharging

With FlexPoint, MSPs can enable or disable surcharges on a client-by-client basis.

This functionality helps MSPs navigate their various relationships with their clients. 

For example, an MSP could bear the cost of credit card processing fees for long-term or high-value clients as a goodwill gesture while still passing the surcharges to other clients. 

This enhanced functionality allows MSPs to manage their surcharging strategies better. They can better balance the competing objectives of recovering costs versus maintaining high client satisfaction rates.

Conclusion: Streamlining Payments with Effective Surcharging Strategies

If they thoughtfully implement surcharging, Alabama MSPs can recover fees on credit card processing while maintaining margins and positive client relationships. 

However, surcharging success requires compliance with state and federal regulations, clear communication with clients, and a well-executed implementation plan. 

By ensuring compliance and billing visibility up-front, MSPs will simultaneously be less at risk for legal issues and more likely to have loyal clients. 

FlexPoint’s platform automatically handles surcharging for these types of services and ensures compliance with the laws of Alabama and other states that regulate them. 

Invoicing features and MSP software integration with tools such as QuickBooks and ConnectWise make it easy to provide straightforward, transparent billing to clients. 

This way, MSPs using FlexPoint can concentrate on growing their business, knowing their surcharging strategy is legally compliant, cost-effective, and customer-friendly.

Empower your MSP’s financial operations in Alabama by surcharging effectively and compliantly. 

FlexPoint is here to make the process seamless—helping you stay within legal boundaries, enhance client experiences, and improve your bottom line. 

Explore how FlexPoint is helping Alabama MSPs transform their payment strategies. 

Ready to stay compliant and maximize revenue? 

Schedule a demo today to see how our solution can simplify and effectively manage surcharging for your MSP.

Additional FAQs: Credit Card Surcharging in Alabama for MSPs

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