Convenience Fees and Surcharge Rules
Posted by anandkgoel on 01 Jul 2008 at 08:00 am | Tagged as: Education, General
We get a lot of questions surrounding the ability for merchants to charge their customers a surcharge or convenience fee for accepting credit cards. This post will attempt to provide a thorough overview of when convenience fees can be charged according to card regulations. We have also included excerpts from Visa, MasterCard, Discover, and American Express of the specific rules that govern the application of convenience fees. And if you are really interested and want nighttime reading, we have also included links to the complete operating regulations of these card brands here.
Here are the important points you need to know. The words “convenience fee” and “surcharge” are used interchangeably.
- A convenience fee cannot be assessed in a face-to-face environment
- A convenience fee cannot be assessed for 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 dues, and utility charges.
- The merchant must provide a true “convenience” in the form of an alternative payment channel outside the merchant’s customary face-to-face payment channels, and the fee must be disclosed by the merchant to the cardholder as a charge for the alternative payment channel convenience that is provided.
- The convenience fee must be disclosed prior to the completion of the transaction, and the cardholder must be given the option to cancel the transaction if not wanting to pay the fee.
- The convenience fee must be included in the total amount of the transaction; it cannot be “split” out from the transaction amount.
- If a convenience fee is assessed it must be for all payments (V, MC, Discover, AMEX, ACH, Check) within a particular payment channel (mail, phone, internet).
- Since all convenience fees are required to be assessed equally, a merchant who accepts Visa is restricted to a flat convenience fee for all cards.
Let us know if you have any questions or if your understanding is different. Read the rest of the article here.
A convenience feee can be charged in a face to face situation for government entities and secondary education.
Thanks for the update Gene. Starting November 2007, MasterCard decided to allow governments to charge a convenience fee to customers who pay by credit card in face-to-face transactions and American Express adopted a similar policy in January 2008. MasterCard’s rules around this change can be found here.
Since Visa and Discover still have not followed suit with this change and since MasterCard and American Express will not allow a convenience fee to be assessed on their brands and not on Visa and Discover Cards, the practical implication is that government entities that want to charge a convenience in face to face transaction must only accept MasterCard and/or American Express. In other words, if a government accepts Visa cards, then it cannot charge a convenience fee on any credit card in face-to-face transactions.
Has Visa changed it’s policy now to allow for a convenience fee on a face to face government transaction?
Thank you for the question Mukesh! Visa does allow a “service fee” to be charged on face-to-face tax payments (only MCC 9311 – Tax Payments) as a percentage of the transaction. The Visa Tax Payment requires registration and the Service Fee must be a separate transaction.
A key component of the program is that the convenience fee be automatically calculated prior to authorization and then submitted and processed as a separate transaction from the fees or taxes being paid. Any Town, City or County that wants to assess a fee back on credit card transactions, regardless of whether it is online, over the phone, in the mail or in person must meet these requirements and must be registered with Visa.
Moreover, Visa requires a special convenience fee rate on their consumer debit cards for Tax Payments not to exceed $3.95. Percentage based fees on Visa consumer debit cards or fixed rate fees greater than $3.95 are prohibited. Government entities can utilize BIN (Bank Identification Number) file management so that Visa consumer debit cards are automatically identified on tax transactions and the $3.95 fee is automatically substituted prior to authorization. Read our other post to learn more about BIN file management…
So who goes punished when say utility companies (municipal gov’t run) allow for convenience fee %0 or in fact take a convneience fee front counter face to face? Or how about the many, many utility companies that take on long e-check say $1.95 and the convenince fee is say eith 3.25% or $3.95
Seems to me the regulators, authorities, merchant service banks are looking the other way and so is VISA
If a municipal government uses a third party service provider for online payments including Visa transactions, can the third party provider seperate out the convenience fee from the principal and deposit only the principal into the cities bank account?
Donovan, the scenario you suggest works for tax payments where two transactions can be run – the first transaction is for the tax amount and goes into the taxing authority’s account the secondary transaction is run for the convenience fee and can be deposited into the third party’s account.
For any non-tax payment, a single transaction must be run that combines both the original amount and the convenience fee. There are ways to manage this process so that the principal amount is deposited into the City’s account the secondary amount is deposited into the third party’s account. Let me know if you would like any additional insight.
As you may know, Visa/MC introduce new interchange categories and new schemes like allowing merchants to charge of convenience fees because they want to get new industries to adopt acceptance of credit/debit cards. As you suggest, there is a legitimate debate that could be had about the overall “value” delivered to consumers who are paying the convenience fee.
However, keep in mind that many utilities and municipal governments have to recognize/record 100% of revenue and they collect from their customers. Either by law or budget constraints they cannot pay credit card processing fees and therefore, have to charge convenience fees to offset merchant services fees.
I am urgently seeking information on VISA’s convenience fee regulations. We have a university wanting permission to charge a percentage-based convenience fee. According to the documentation I can access of VISA’s regulations, only a flat rate fee is permitted. I do recall having received permission from VISA in the past for a merchant to charge a percentage-based convenience fee. MasterCard regulations do allow for a percentage-based convenience fee, and I am hoping VISA does as well.
Regarding non-tax payment where a single transaction must be run that combines both the original amount and the convenience fee…if the cardholder pays in a single transaction and it appears on their statement as a single transaction, can the third party have a secondary account where the fee is deposited? I assume this is a function of the third party software. What other ways are there to do this? Thanks!
what we have seen more often is the third party and merchant setting up a custodial account, whereby, the proceeds from the single transaction are deposited into a single custodial account and from there, the third party can take its fee and the remaining funds are swept into a merchant account.
So, what I understand is that governments wishing to take tax-payments with a visa will have to process 2 payments, one for the total, the other for the fee. The governments will most likely still get charged the visa processing fee for the tax total, but it will have to be offset by the fee transaction. Is my understanding correct?
In this scenario, the 3rd party would have to pay the government the difference when balancing at the end of the month. If the government wanted to collect $10.00 plus a $2.00 convenience fee, and visa only gave him $9.50 after processing charges, the 3rd party that had the $2.00 fee transaction, would have to pay the difference to the government. This is the way I’m understanding it. Please correct me if I’m wrong…
Alex, your understanding is correct on the first part of your question – process two separate transactions whereby the credit card processing fee is offset by the convenience fee. The second part of the question relates to the split of the convenience fee between the 3rd party and merchant…the split depends on what is negotiated between the two parties.
here are the salient points for Visa tax payments:
*Visa Tax Payment Program rules apply to the payment of personal income, real estate property, other personal property, unemployment, sales/use and business income taxes.
*Fee can be percentage-based fee
*Fee can be separated into a second transaction
*Convenience fee must be the same for all other non-Visa credit card products (MC, Amex, Discover)
*Different fee can be charged for ACH transactions and Debit (capped at $3.95 for Visa Debit card)
*Fee can be collected by a third party service or company
*Fee can be collected in a Retail (face-to-face) environment.
Are private elementary and secondary schools allowed to charge a convenience for Visa transactions?
yes. here are some general guidelines…
Must provide a true “convenience” in the form of an alternate payment channel
Fee is designed for one-time payments only
Fee cannot be applied to recurring payments
Fee must be a flat fee
Fee must be equally assessed to all payment types in the same channel
Fee must be included in the total amount of the transaction: it cannot be split out from the payment
Fee must be assessed by the same merchant actually providing the goods or services
Fee cannot be collected in a Retail (face-to-face) environment.
my question is…Is it legal for my apartments to charge a fee of $12.95 to pay with credit card online? It is not just a one time fee, if I pay online any other time again I will have to pay it again.
It is perfectly legal for an apartment to charge a convenience fee if you pay via credit card online. Apartments typically haven’t accepted credit cards due to processing fees. Now, some apartments accept cards because they can charge a convenience fee for truly providing a “convenience” to renters.
You can avoid this fee altogether by dropping off a check to the apartment office.
WE are currently running advertising on many radio stations. Have currently started on a new station and will have monthly billing. Went to pay with a Credit card & answer was that a 2.5% charge will be added to each transaction as a convenience fee?
Is this legal?
Please advise.
thanks
andrew
Andrew,
Visa regulations prohibit a merchant from charging a convenience on recurring transactions. So a merchant can charge a convenience on recurring transactions if they do not accept Visa. Moreover, the radio station has to charge the same convenience fee for all the payments (credit card, debit card, ACH) that are accepted via the “convenience” channel (i.e. web, phone, etc.).
In terms of being being “legal”….there are no laws that govern convenience fees, outside of a few industries like insurance. There are only card association (Visa, MasterCard, AmEx, and Discover) regulations. If the merchant isn’t following the regulations, you can inform the merchant and inform the bank that issued your credit card. At the end of the day, if you don’t want to pay a convenience fee send the radio station a check.
I am a General Manager for a Water District in Texas. We are reviewing the rules on a local governments legality to assess a convenient fee to make the transaction revenue neutral. After reading various rules it appears that if a customers logs on to the District’s website/a third party website or uses a phone to pay the water bill with a credit card it is OK to assess a convenient fee. Is it legal in a face to face transaction with VISA MC and Discover to assess a convenient fee?
The bills customers are paying will be for water and sewer gallonage, a water and sewer base fee, and any late fees or penalties ect.
Please help!
Tommy McDonald
Manager
JCWCID 10
Keep in mind that a convenience fee is applied for all payment “tender” accepted within a channel. So if you are only accepting credit/debit cards via web/phone then you are fine to charge a convenience fee. However, if you accept e-check via the web then you have to apply the same convenience fee to the e-check.
For the Utility vertical, Visa does not allow a convenience fee for face to face transactions. However, if you do not accept Visa then you can charge a convenience for face to face transactions. Again, you have to charge the same convenience fee if anyone pays by check in a face to face environment. You may limit cards to web/phone and redirect face to face customers to these channels.