The latest data on the most popular payment methods in restaurants indicates that credit cards are becoming an increasingly attractive choice for obtaining restaurant meals. According to an April 2020 Bankrate survey, customers relied on credit cards for more than half of their takeout orders. By comparison, this survey found that customers only used cash in 17% of restaurant orders.

Sometimes restaurants charge different prices for items depending on whether you pay with cash or credit. Linda emailed VERIFY asking if restaurants can legally charge more for using credit cards.

Can a restaurant charge a customer different prices for credit card and cash payments?

Yes, a restaurant can charge a customer different prices for the use of credit cards and cash payments.

In all states, it is legal for restaurants to charge customers more for purchases made with credit cards than for purchases made with cash. In most states, they can achieve this for an additional 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.

The charge applied to credit card purchases is called a surcharge. A restaurant must apply these charges equally to all credit cards and must clearly disclose the charges before the customer makes payment.

The U.S. General Services Administration (GSA) explains that a 2013 settlement between a class of retailers and credit card networks Visa and MasterCard allowed 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, according to the GSA. These states represent 40% of the US population.

However, it is legal in all states for merchants to offer a “cash discount.” For example, a restaurant menu might include a note that there is a 3% discount for all cash purchases. Alternatively, a restaurant may 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 prohibit surcharges. The state of California even allows merchants to include debit card and check purchases in this discount. Just as merchants must inform consumers of surcharges before they make their purchase, merchants must also always inform consumers of the existence of these discounts before their purchase.

The National Merchant Association (NMA) explains that the difference between a surcharge and a discount basically comes down to advertising. A merchant applying a credit card surcharge may advertise lower prices that exclude fees, while a merchant using a 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 have to pay a processing fee for each card payment they accept. Credit card payments incur much higher processing fees than debit card payments. The surcharge is a way of passing these costs on to the consumer and, in the case of a rebate, the merchant passes on to the consumer the savings he has made by avoiding these handling costs.

In 2013, Visa and MasterCard settled a U.S. Department of Justice lawsuit that alleged Visa, MasterCard, and American Express engaged in anticompetitive practices by prohibiting merchants who accept their credit cards from encouraging consumers to use payment methods that are less expensive to process. American Express fought the lawsuit in court, but the Justice Department ultimately won the case.

Merchants sign contracts with card payment networks to accept and process payments that customers make using cards from these networks. Previously, card networks required merchants to treat every payment method the same, even though merchants earned less money for each credit card purchase due to high fees. Many rules regarding surcharges are still defined by these contracts – for example, Visa and MasterCard explicitly prohibit their merchants from surcharges on debit cards.

The NMA says merchants aren’t allowed to apply surcharges to debit card transactions at any level, but it adds that debit cards may be excluded from discounts for cheaper payment methods. This means that a restaurant is allowed to offer cash back without extending that cash back to debit cards.

Even in states that prohibit surcharges, some merchants may have the option of charging a convenience fee for payments deemed “non-standard” for their business. Credit card networks generally limit these types of charges to a few specific situations, and they cannot be applied to the same purchase as a surcharge.

Surcharges and convenience fees cannot exceed the cost of the processing fee, and most states have similar restrictions on cash remittances.

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