ETA Expert Insights: Convenient and Compliant?

Understanding the difference between compliant and non-compliant “Convenience Fee” payment models.

By Cleveland Brown, CEO, Payscout, Chair of the ETA Payment Sales and Strategy Committee.

There has been a lot of movement in the payments industry recently regarding fee-based payment processing models. While there are compliant ways to implement these solutions, many non-compliant models exist.

Recently, we highlighted a pattern of surcharge programs masquerading as Cash Discount solutions. A similar trend is emerging with Convenience Fees models: There are solutions available on the market that add fees to purchases or payments as a separate transaction. While these programs are often billed as “Convenience Fee” models, charging a convenience fee as a separate transaction is expressly prohibited by the card brands.

Often times, ISOs, ISVs, and resellers are unaware of the non-compliance of the solutions they’re promoting, which opens their business to risks of liability and leading to potentially severe consequences.

There are three layers of compliance to consider when reviewing any fee-based payment processing models: Federal law, State law, and Card-Brand rules. Visa’s rules related to fees not only delineates how and when they can be applied, but also defines three (3) specific kinds of fees: Surcharges, Service Fees, and Convenience Fees. Here’s a high-level overview:

• Surcharges are fixed or variable fees that are added to transactions when the customer pays with a credit card.
• Service Fees are fixed fees that can only be applied by certain government or education entities, and are not specific just credit card transactions.
• Convenience Fees are fixed fees charged for providing the consumer with an alternative card-absent payment method that provides a bona fide convenience.

There is a misguided principle that adhering to just the Federal and State laws is sufficient, and as a result, many solutions do not take the Card-Brand rules into account. As an example, Visa has an explicit set of 10 rules for which merchants charging a Convenience Fee in the US must follow, however, many solutions are not fully compliant with these rules.

Visa’s Products and Services Rules state that Convenience Fees have to be Included as part of the total amount of the Transaction and not collected separately. Solutions which process convenience fees as two separate transactions are therefore not compliant with Visa rules.

Convenience Fees can only be ‘charged for a bona fide convenience’ in the form of an alternative payment channel outside the Merchant’s customary payment channels and not charged solely for the acceptance of a Card. To determine whether a bona fide convenience is really being provided to the consumer, the following questions should be considered:

• What is the convenience provided to the customer?
• Why is it a convenience?
• How will this convenience be provided?

A good example for applying these three questions is in the Accounts Receivable Management (ARM) space: When a consumer is attempting to make a debt repayment and is able to settle debt via online payments instead of through traditional mail notification, a bona fide convenience is being offered to the consumer to make that payment, and so it stands to reason a “Convenience Fee” may be applied to that transaction.

In terms of asking “why” the web-based debt repayment is a convenience, the ability to resolve debt more quickly and efficiently saves the consumer both time and money. As for how this convenience would be provided, this convenience would be provided via the collection agencies website, and the convenience fee would be charged only for payments made online.

Complying with Federal and State guidelines, and ignoring card-brand requirements, paradoxically exposes the merchant and opens them back up for civil/state/federal lawsuits. Not complying with the Card Brand rules can lead to serious consequences, putting the merchant at risk of losing the ability to accept payments altogether.

Michael Del Valle, an attorney with The Sessions Firm states, “Non-compliance with card-brand rules can compromise your merchant account entirely, and expose your business to liability. This can lead to ramifications all through the ecosystem, putting not only the merchant but also the processor and financial institution all at risk.”

Whether you’re a merchant, and ISO, ISV, reseller or an agent, you should be asking your payment processing provider the following questions to help determine if a Convenience Fee solution is compliant:

• How does the software handle variances across state regulations? State law is dynamic and ever-changing, which is why it is crucial to know whether the software has built-in logic to determine state compliance, so that you can rest assured that your solution is always up to compliance standards in all 50 states.
• How does the convenience fee charge show up on the merchant statement? When a convenience fee appears on the receipt, it should not be listed as being charged from the merchant/business that you are providing your card information to.
• Is the convenience fee processed as a single transaction? As highlighted above, Visa rules indicate that convenience fees have to be included as part of the total amount of the transaction and not charged as 2 separate transactions.

Interested in contributing to payments industry thought-leadership? Apply to join an ETA committee for 2020 here.