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Being a merchant is expensive. Your mission is to save money or boost profits any way you can. After all, your bottom line is at stake. This concern for the health of your business can drive you toward long-term success. But, if you try to bring in more money through credit card convenience fees, there are a few things you need to know to keep your business out of trouble!
What is a Credit Card Convenience Fee?
A convenience fee is an additional charge to your consumer beside the payment due. It is called a ‘convenience’ because your business has provided the consumer another avenue from which they may make a payment (outside the standard payment channels). For instance, because a card present merchant may accept primarily cash, accepting a credit card can be considered a convenience to the consumer, thus this merchant may be eligible to charge a convenience fee.
For merchants in an exclusively card-not-present environment, charging a convenience fee can’t be done, as it is no longer an added convenience to the consumer. For example, many third party collection agencies do accept in-person payments. This may allow them to charge a convenience fee on a credit card payment. If a third party agency made it a policy not to accept in-person payments, however, they would be disqualified from charging a convenience fee.
It is important to remember that other factors also determine whether your business can charge this type of fee. Let’s take a look at some of those rules.
Rules For Charging Credit Card Convenience Fees
As a merchant, you can charge a convenience fee for credit cards under the following circumstances:
- The fee is indicative of an actual convenience, such as web or telephone payments, and must be charged for every type of payment in that channel. This means that if your agency accepts ACH payments as well as credit cards, you must charge a fee for all web and telephone payments, whether they are paid with credit card or ACH.
- The fee cannot be charged to those paying in person (in a card present environment).
- The fee is explained to the cardholder in easily understandable language as a charge for the convenience provided to them.
- The business collecting the payment IS NOT a card not present environment.
- The fee is NOT a percentage of the amount being paid, but rather a fixed amount.
- The consumers must be told before the time of the payment that they are being charged a convenience fee. They must also be given a chance to cancel the payment and pay another way if they wish.
- There are ten states which have deemed convenience fees illegal: California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma and Texas. They are also not permitted in Puerto Rico. If you are collecting a payment in any of these states, you can not charge a fee.
- A convenience fee may not be charged on recurring payments.
Are the Rules Different for each Credit Card Company?
Yes, the rules for charging a convenience fee are different for each credit card company. However, Visa’s rules are considered the most stringent. If a merchant follows the guidelines that Visa has put forth, they will have satisfied the rules of all other credit card companies.
Special Considerations For Collections Agencies
- Because many consumers pay their debts in installments (through recurring transactions), collectors should remember that according to Visa’s rules, convenience fees can not be charged to recurring payments in a schedule.
- Often times, agencies collect in states outside of their state of operation. It is important to remember that charging of convenience fees may be acceptable where you are headquartered, but may be illegal in the state where your debtor resides. Make sure you understand how your payment processing software works, so you don’t unintentionally charge fees to those in protected states.
Is Surcharge Just Another Name for Convenience Fee?
No! Surcharges, which only apply to credit cards, must be set up by the company providing the goods/services being charged. The business must also be registered with VISA for this purpose. Therefore, surcharges would never apply to a collection agency. The debt collected by agencies is not for products or a service their business has provided.
Also keep in mind that surcharges must be included in the total the consumer is paying. For example, if the surcharge for a $100 payment was $5, the total would be $105, not $100, plus a separate $5. Also, just like many convenience fees, a surcharge cannot be used for a card not present only environment.
Understanding the difference between a convenience fee and a surcharge is very important. Surcharges cannot be placed on debit card transactions. Because of this, merchants must be aware of how their payment systems work. Many payment systems are not able to differentiate between debit and credit charges, which can cause you to inadvertently violate surcharge regulations. Understanding how your payment system functions can help you avoid penalties for improper charges to customers.
What is a Service Fee?
You may also be familiar with the term ‘service fee,’ as another type of charge which may be passed to a consumer.
One important fact to note is that in the United States, Visa (according to page PSR-315 of the Visa Public Rule book) only allows service fees to be assessed by “a government agency or education Merchant, or its third party.”
This restriction makes service fees unusable for those in the collection space on all collections that do not apply to government or education merchants. In addition, those eligible who wish to collect service fees must register with VISA before the fees can be charged to consumers.
Many payment processing companies are claiming to offer ‘free to merchant’ pricing by charging service fees. Because VISA does not allow them except for the two types of payment listed above, it is not advised to adopt this type of payment model for your business.
What Happens if I Improperly Apply Credit Card Convenience Fees to Customer Credit Card Transactions?
Unfortunately, violating convenience fee rules can come with some hefty consequences. Those who don’t follow the rules put in place by credit card companies can find themselves barred from accepting credit card payments.
Merchants who improperly impose convenience fees can also find themselves in legal trouble. Failing to disclose the terms of a fee, or charging fees in a state that does not allow them are both violations of the FDCPA, and are grounds for a lawsuit. This article from insideARM is one story of legal action taken against a collector. This article describing a proposed class action suit is another consequence of misleading convenience fees. Cases like these can serve as warnings for those in the collection industry to follow guidelines set by credit card companies and enforced by the CFPB. For a more detailed breakdown of pay-by-phone fee rules according to the CFPB, check out this article by Ballard Spahr LLP.
Remember, it may seem difficult as a merchant to manage the processing fees related to credit card transactions, but not accepting credit cards can potentially lose you a lot of business. Each payment channel a merchant provides makes it more likely that a payment will be collected. If you follow the rules, your agency will be able to collect more, and make paying bills more convenient for your customers.
For a concise breakdown on the information provided in this article, please download our Credit Card Convenience Fees Guide: