Many Kentucky MSPs find managing credit card processing costs challenging, especially when handling recurring payments and large transaction volumes. Credit card surcharging has the potential to substantially reduce these costs, benefiting an MSP's bottom line.
Surcharging is currently allowed in Kentucky, allowing MSPs to pass on credit card processing fees to clients. However, it must be implemented in accordance with state and federal legislation or risk severe repercussions.
Card networks like Visa and Mastercard also impose rules on applying surcharges, which MSPs must adhere to or face further risks.
This article clarifies how Kentucky MSPs can navigate surcharging laws, outlines practical steps for implementing surcharges, and highlights how an automated payment platform like FlexPoint streamlines the 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. Perform 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 Kentucky?
Credit card surcharging offers MSPs a way to address the growing cost of processing payments. By passing a portion or all of these fees to clients, MSPs can protect their margins without compromising client service quality.
Credit card processing fees typically range from 2% to 4% per transaction, including charges like interchange and assessment fees. For MSPs handling significant payment volumes, these costs can add up quickly.
Imagine a Kentucky MSP managing $100,000 in monthly credit card transactions, with processing fees averaging 3%. This results in $3,000 in fees each month or $36,000 annually.
For many MSPs, these costs limit their ability to reinvest in and grow their companies.
By introducing a 3% surcharge, this MSP could pass the processing fees directly to clients, recovering $3,000 per month.
The business saves $36000 over a year, which it could use to upgrade its technology, hire additional staff, or expand its service offerings.
Some MSPs prefer a more measured technique, passing only part of the cost to clients.
For instance, a 1.5% surcharge would cover $1,500 of the $3,000 monthly fees, leaving the business to absorb the rest. This approach reduces financial strain while preserving client goodwill.
The key to successful surcharging is transparency.
Straightforward communication about surcharges helps clients understand why these fees are applied and reduce the likelihood of disputes.
Kentucky MSPs considering surcharges must comply with state laws, federal regulations, and card network requirements while sustaining optimal client relationships.
Understanding Credit Card Surcharging Laws in Kentucky
As of December 2024, the State of Kentucky allows businesses to apply surcharges to credit card transactions, but MSPs must follow the state's specific guidelines.
For example, while the federal surcharge cap is 4%, Kentucky has its own limits (per Bill HB 529):
“Any seller who legally imposes a surcharge on a buyer who elects to use a credit card, as defined in KRS 286.3-710, as the method of payment in a sales transaction shall:
(1) Charge a fee that does not exceed the lesser of:
(a) The actual cost of the interchange transaction fee that is charged to the seller, less the amount permitted by 12 C.F.R. 235.3 or its successor; or
(b) Three percent (3%) of the full amount of the transaction”
This means that even if the credit card processor charges a business a 4% fee, the MSP cannot automatically pass that cost on to the customer.
Instead, the MSP must apply a lower amount of either the actual processing fee or a flat 3% of the transaction amount.
Debit and Prepaid Card transactions cannot be surcharged, even if processed as credit. This limitation is enforced under the Durbin Amendment of the Dodd-Frank Act.
Businesses that implement fees in Kentucky must also meet transparency requirements. Clients must be advised of the extra charges before completing the transaction.
Transparency is critical to ensuring compliance and maintaining excellent client relationships. Surcharges should be clearly disclosed on invoices and receipts so clients understand the additional cost.
Kentucky state law has strict requirements for how these charges are disclosed:
“2) Post a notice advising the buyer of the percentage of the surcharge at the entrance of the seller’s physical location, if applicable, and on the seller’s Web site home page, if applicable;
(3) Post a notice advising the buyer of the percentage of the surcharge at the point of sale, whether at a physical location or online;
(4) Disclose on the buyer’s receipt, whether a physical or an electronic receipt, the actual dollar amount of the surcharge for each item purchased, based on the item’s percentage of the total transaction cost. Disclosures under this subsection shall be separately disclosed next to each item and identified as "merchant surcharge"; and
(5) Disclose on the receipt the fact that the surcharge cannot be applied to debit card purchases and that it cannot exceed the actual costs to the seller for accepting credit cards and provide for a method by which the buyer may immediately challenge the accuracy of the surcharge.”
In summary, this means Kentucky MSPs must be fully transparent about credit card surcharges at every stage of the transaction process.
Clients must be informed about the surcharge percentage before making a purchase. This applies to businesses that use both in-store and online POS systems.
For MSPs, whose operations are online, these requirements mean displaying surcharging percentages on the business’s website's homepage and at the checkout or payment screen.
On receipts, MSPs must break down the surcharge amount for each item purchased, labeling it as a "merchant surcharge," so it’s clear this is a separate fee.
Receipts must also specify that surcharges do not apply to debit card payments and must confirm the surcharge does not exceed the seller’s actual credit card processing costs.
Note: We also recommend that Kentucky MSPs consult a legal professional if they have any questions about compliance or implementation.
Implementing Credit Card Surcharging for Kentucky MSPs
Surcharging requires more than simply adding a line item to your invoices.
A clear surcharging policy, reliable tools, and transparent client communication are fundamental for success. These elements help clients understand the rationale behind surcharges, reducing the risk of disputes.
According to a survey by PYMNTS, 70% of respondents report that surcharges negatively affect their opinion of a merchant. Additionally, nearly 40% reported they might seek an alternative merchant that does not charge these fees.
Surcharge rates must be balanced to recover costs without alienating clients. So, the process of credit card surcharging must be handled with finesse.
The following step-by-step guide helps Kentucky MSPs adopt surcharges while sustaining client relationships.
Step 1: Establish a Clear Surcharge Policy and Structure
A well-defined surcharge policy outlines how fees are applied, their percentage or amount, and the implementation process.
Include this policy in client agreements to promote transparency and avoid surprises.
Depending on transaction size, client type, client type, or payment methods, MSPs may choose between fixed percentage surcharges, flat fees, or tiered systems.
Here are examples of common surcharge structures:
a. Fixed Percentage Surcharge
An MSP applies a 2.5% surcharge to all credit card transactions.
Example: A client receives an invoice for $6,000 in services. The 2.5% surcharge adds $150, bringing the total to $6,150.
b. Tiered Surcharge System
Surcharges are adjusted based on transaction amounts, such as 2% for transactions below $4,000 and 3% for those above $4,000.
For example, a $3,500 invoice would include a $70 surcharge (2%), while a $5,000 invoice would have a $150 surcharge (3%).
Carefully consider your surcharge structure to balance cost recovery and client satisfaction.
Step 2: Notify Credit Card Networks and Clients
Before implementing surcharges, Kentucky MSPs must notify their credit card networks (e.g., Visa, Mastercard) and their clients.
Credit card networks require at least 30 days’ notice before applying surcharges.
For instance, Visa mandates that U.S. merchants submit a notification form to Visa and their acquiring bank.
Communicating with clients about surcharges is equally essential—explain how the surcharge works and why it’s necessary.
Example Communication:
“Due to rising payment processing fees, a surcharge of 3% will be applied to credit card payments starting [date]. This fee offsets transaction costs and ensures we can continue offering high-quality services.”
Failure to notify clients can result in payment disputes and chargebacks.
For example, if a client expects to pay $8,000 but finds an unexpected $240 (3%) surcharge on their invoice, they may dispute the charge with their card issuer, assuming it was added incorrectly.
According to data from Swipesum, the average cost of a chargeback for businesses is $190 per dispute.
Straightforward communication can thwart these issues, preserving both revenue and client trust.
Step 3: Update Invoicing and Billing Systems
Surcharges must be prominently displayed on invoices as separate line items. This ensures clients understand what they are being charged and why.
For instance, an invoice for $4,500 with a 3% surcharge should show:
- Service Fee: $4,500
- Surcharge (3%): $135
- Total: $4,635
Payment Automation tools like FlexPoint simplify this process by calculating surcharges accurately and integrating them into invoices. These tools eliminate guesswork and reduce the risk of human error.
Step 4: Monitor and Review Compliance
Evaluate your surcharging practices regularly to confirm compliance with Kentucky laws, federal regulations, and card network policies.
As of 2023, Visa limits surcharges to 3%, while Mastercard allows up to 4%. In any case, however, businesses cannot charge more than their actual processing costs.
However, Mastercard’s 4% surcharge cap is irrelevant in Kentucky.
Per House Bill 256, in Kentucky, businesses still cannot exceed the state’s 3% surcharge cap. If their interchange rate is lower than 3%, they cannot exceed that either.
For example, if a merchant’s discount rate (MDR) is 2.75%, the surcharge must not exceed 2.75%.
To remain compliant, Kentucky MSPs must evaluate their processing costs and alter surcharge rates as required.
Changes in card brand policies can also affect surcharging limits.
Proactively managing these changes allows MSPs to maintain compliance and protect client relationships.
Kentucky MSPs can successfully adopt credit card surcharging by creating clear procedures, automating surcharge calculations, and communicating effectively with clients.
Remaining informed about legal requirements will keep surcharging practices both compliant and client-friendly.
The Role of FlexPoint in Simplifying Credit Card Surcharging for Kentucky MSPs
Due to the sheer volume of transactions they manage, credit card processing fees can become a significant challenge for Kentucky MSPs.
High transaction volumes and recurring payments can quickly erode profit margins, making effective cost management a priority.
FlexPoint offers a comprehensive solution tailored to MSPs' unique needs, enabling businesses to address surcharging challenges with efficiency and compliance.
Payment Processing Plans
FlexPoint provides two flexible payment processing options that cater to different MSP operational preferences:
- Interchange+ Plan
- Customer Surcharge Plan
Let’s review how both these plans work.
a. Interchange+ Plan
This plan uses a transparent pricing model based on the interchange rate for each card type.
Costs vary depending on the card used, offering flexibility for MSPs that prefer to absorb processing fees rather than passing them on to clients.
Lower interchange rates apply to cards with lower interchange (such as Discover), reducing fees to as little as 1.5%.
Conversely, premium cards like American Express or high-reward credit cards have higher rates, often around 3.5%.
While exact costs are difficult to determine until payments are processed, Kentucky MSPs on the Interchange+ Plan typically experience:
- Rates as low as 1.5% for low-point credit cards.
- Rates up to 3.5% for premium and high-reward cards.
This variability makes Interchange+ a strong choice for MSPs aiming to reduce costs without passing fees onto clients.
This plan allows businesses to prioritize a seamless client experience while nurturing trust and satisfaction.
b. Customer Surcharge Plan
The Customer surcharge plan shifts processing costs to clients by applying a flat surcharge to all credit card transactions.
When a 3% surcharge is applied across the board, covering processing costs without impacting the MSP's bottom line. The surcharge must be adjusted accordingly if this exceeds the merchant discount rate.
This approach will benefit MSPs looking to cut costs while retaining client transparency.
FlexPoint also enables a hybrid strategy. MSPs can split fees with clients for specific cases and balance cost management with client satisfaction.
How FlexPoint Enhances Compliance and Transparency
FlexPoint simplifies surcharging by calculating all charges within Kentucky’s regulations, federal laws, and card network policies.
This includes adhering to the state’s 3% surcharge cap and network-specific limits, such as Visa’s 3% ceiling.
Payment Terms:
Payment is due within 30 days of the invoice date. The surcharge complies with federal regulations (under the 4% limit), Kentucky state laws (not exceeding 3%), and card brand guidelines.
Notes:
Surcharges cannot be applied to debit card purchases or exceed the actual costs to the seller for accepting credit cards.
If you believe the surcharge applied to your transaction is incorrect, please contact us within 30 days of the transaction. You can reach us by phone at (XXX) XXX-XXXX, email at support@example.com, or through our online dispute form at www.example.com/dispute.
Thank you for your business!
This level of detail reduces disputes, promotes client trust, and aligns with compliance standards.
FlexPoint’s Integration with MSP Tools for Seamless Billing
FlexPoint seamlessly integrates with widely-used MSP tools, such as:
FlexPoint automates invoicing, billing, and reconciliation by connecting with these systems, significantly reducing manual administrative burdens.
For example, if you integrate your QuickBooks Online with FlexPoint, you can automatically update financial records with surcharge details, guaranteeing accuracy and readiness for reporting.
This synchronization eliminates manual entry, reduces errors, keeps financial information consistent, and ensures readiness for reporting or analysis.
Offering Flexibility in Surcharging
FlexPoint allows MSPs to customize surcharging practices to suit individual client relationships.
MSPs can cover surcharges for long-term clients while applying surcharges to newer or less active accounts.
FlexPoint also automatically applies correct limits for card networks, ensuring fees remain within allowable thresholds.
For example, a client paying with a Mastercard can be charged a 2.75% surcharge, matching the processing rate without exceeding Mastercard’s 4% cap.
This approach minimizes compliance risks and ensures smooth payment processes for both MSPs and their clients.
FlexPoint’s branded payment portals also allow clients to view and manage payments easily, enhancing transparency.
When clients can review surcharge details before payment, this reduces misunderstandings and the likelihood of payment disputes.
They may also modify payment methods when cards expire or use different methods to save money, such as switching from a premium credit card to one with reduced rates.
A client regularly using a premium credit card might consider switching to ACH payments to avoid a surcharge. This flexibility fosters trust and satisfaction and saves time for both the client and the MSP.
FlexPoint’s comprehensive surcharging solutions simplify compliance, enhance client communication, and optimize operational efficiency for Kentucky MSPs.
By automating these processes, MSPs can focus on what they do best—serving their clients and growing their businesses.
Conclusion: Streamlining MSP Credit Card Payments with Effective Surcharging Strategies
Credit card surcharging proves to be an effective option for Kentucky MSPs striving to lower credit card processing costs.
However, successful implementation requires a strategic approach underlining transparency and compliance with federal, state, and card network regulations.
Invoices must display surcharge amounts, and clients should be informed upfront about surcharging practices. To avoid penalties or disputes, MSPs must also ensure their surcharges stay within allowable limits.
FlexPoint simplifies this process for MSPs from beginning to end.
FlexPoint’s tailored payment automation platform streamlines surcharge implementation, assuring compliance with Kentucky regulations while reducing administrative burdens.
Enhance your MSP’s bottom line and compliance with automated credit card surcharging solutions from FlexPoint.
Stay within Kentucky’s regulations and simplify your MSP payment processes using FlexPoint today.
Schedule a demo to see how FlexPoint can transform your financial operations and maximize profitability.
Additional FAQs: Credit Card Surcharging in Kentucky for MSPs
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