Insights

In slightly more than a decade convenience fees on credit and debit cards have evolved from application in a specific market to wide adoption across many industries.  This article looks at the growth in usage of convenience fees, application within specific verticals, and card network regulations.

I. Background & Growth in Convenience Fees

The card associations are always exploring new avenues of card acceptance.  Government institutions and agencies traditionally have not accepted credit/debit cards either due to regulations requiring collection of full payment, regulations against paying transaction fees, capital required for POS hardware and software investment, or simply maintaining status quo.  Seeing the opportunity in the government sector, the card networks developed convenience fees as a means to encourage card acceptance and offset the cost of card payments.

The Taxpayer Relief Act of 1997 authorized the United States Treasury to accept credit/debit card payments for federal taxes but prohibited the IRS from paying credit card transaction fees.  Beginning in early 1999 the IRS began accepting income tax payments via credit card.  53,000 payments were made in 1999 and while the program grew steadily at 70%-100+% per year, it wasn’t until 2005 when more than one million payments were made via credit card to the IRS.  The IRS payment program(s) spurred both changes in the operating rules of Visa and other card schemes and expanded convenience fee programs across variety of industries.

Today, the vast majority of convenience fee programs are implemented within the following merchant categories.  Optimized Payments grouped merchant categories into tiers and have estimated their market based on our experience.

Tier I: – Represent 85% – 90% of all convenience fee programs

• • Government – Public Sector: Property taxes, fees, fines, penalties and licenses
  • Utilities – Public or Private Sector:  Electric, gas, telephone, wireless phone, cable
  • Education – Tuition, fees, room and board

Tier II: – Represent 5 – 10% of all convenience fee programs

• • Insurance:  Property, auto, casualty, health, life insurance
  • Property Management:  Property rent or lease payments

Tier III: – Represent 2 – 5% of all convenience fee programs

• • Club Dues and Memberships
  • Day Care/Child Care
  • Towing/Vehicle Impounds
  • Rent to Own
  • Self Storage

A 2006 study revealed that taxpayers are hesitant to utilize credit cards for tax payments due to the convenience fee(s).  The study revealed the following:

• 68% of American adults were aware that the Internal Revenue Service accepts credit cards
• 1% planned to use a credit card to pay incremental Federal income taxes for 2005.
• 78% said they “definitely would not” use a credit card the next time they owe incremental federal income taxes. Instead, they will resort to the usual personal check (62%), money order (11%) or direct debit from a bank account (7%).
• 23% would pay via credit card if there were no fees associated with the payment

Taxpayers value the convenience and loyalty benefits of using a credit card but are resistant to pay a premium for the benefit in the way of a convenience fee.  However, some taxpayers will use a credit card and pay a convenience in a “last minute situation” whereby, immediate payment via a credit card avoids late fees or penalties.  To this end, successful convenience fee programs are most often implemented in a “must pay” situation where there is a large customer base from which to solicit payments, a necessity considering the low adoption rate(s) when a fee-based program is implemented.  As such, government, education, and utility merchants represent the vast majority of convenience fee program implementations.  The merchants in these cases are “monopolies” with little competition for their specific services.  In most cases, these merchants have a view of their customers where they believe they will, “get their money one way or another,” and see little value in accepting credit card payments, like a traditional merchant would.

In the private sector merchants typically accept credit/debit card payments not only as a convenience to their customers but because it can reduce cash/check handling and reconciliation costs, increase funds availability to the merchant, minimize risk, and increase customer spend as cardholders typically spend more when using a credit card product.

In the government, education, and utility segments, merchants often-times see little value in accepting credit/debit payments without offsetting the processing costs with convenience fee programs.  Because customers don’t like paying convenience fees, these programs rarely work in the private sector due competitive pressures.  If a merchant implements a convenience fee program and their competition provides similar goods or services at no additional cost, customers will migrate to the competition.

II. Card Network Rules

All card associations including Visa, MasterCard, American Express, and Discover have policies in place surrounding convenience and service fees. Generally speaking, the Visa rules are more restrictive than MasterCard.  AmEx’s rules are very similar to MasterCard and Discover will allow (almost) anything.

The card networks are very sensitive to words that are used to describe convenience fees.  For instance, merchants cannot “surcharge” or charge consumers a fee for using a credit/debit card.  The prohibition on surcharging ensures that credit cardholders are not discriminated against at the register.  However, “convenience fees” are completely allowed.

So a convenience fee is defined as a charge when a bona fide “convenience” is provided to a consumer for utilizing an alternative payment channel (e.g. internet, telephone).  The only exception to this rule is tax payments.  The requirement for an alternate payment channel means that catalog or e-commerce merchants whose payment channels are exclusively non face-to-face may NOT impose a convenience fee.

Here are the general convenience fee rules although there are nuances and some differences between the card networks:

1. A convenience fee cannot be assessed for most recurring payments.  The convenience fee was designed for one-time payments and not for payments in which a cardholder allows his credit card to be periodically charged for recurring goods or services.  Examples of recurring charges include, but are not limited to, insurance premiums, subscriptions, Internet service provider monthly fees, membership fees, tuition, or utility charges.  The only exception to this rule is for Visa recurring tax payments processed on a Debit card only.
2. The convenience fee must be disclosed to customers as a charge for alternate payment channel convenience
3. The fee must be applied only to non face-to-face transactions (exception for tax payments)
4. The fee must be a flat or fixed amount regardless of the amount of payment due (there is some variation with card networks)
5. The fee must be included as part of the total transaction (exemption for tax payments and differences between networks)
6. The customer must be given the opportunity to cancel prior to the completion of the transaction

III. Additional Resources

In addition to the card network regulations listed below, Optimized Payments has prepared a thoroughly researched report on convenience fees.  The report is available for $995 and it summarizes convenience fee rules by each card network and presents industry best practices for non-tax and tax convenience fees.  Contact monika@optimizedpmts.com for more information.

Visa Rules – https://optimizedpayments.com/regulations/visa-usa-operating-regulations.pdf

MasterCard Rules – https://optimizedpayments.com/regulations/mastercard-operating-regulations.pdf

Discover Rules – https://optimizedpayments.com/regulations/discover-operating-regulations.pdf

American Express Rules – https://optimizedpayments.com/regulations/amex-operating-regulations.pdf