In the accounts receivable management (ARM) world, convenience-fee payment models are growing in popularity, and for good reason: When applied correctly, they have the ability to reduce a merchant’s payment processing costs significantly by charging the consumer or debtor a flat fee for the convenience of accepting payments online or over the phone (depending on the consumer’s/debtor’s State of residence).
What many collection agencies may not realize is that convenience-fee solutions are the subject of serious scrutiny from compliance experts (and enforcers), and if they’re not properly applied, they can cost the merchant their ability to accept payments altogether. Having their merchant accounts closed, being blacklisted, and being cut off from their banks are just a few of the potential hazards for a merchant who deploys this model without doing their due diligence.
Convenience Fees and Compliance
There are three layers of compliance that a merchant must consider if they are using a convenience-fee model:
- Operating in accordance with the Fair Debt Collection Practices Act (FDCPA), a federal law that governs the practices of third-party debt collectors;
- Adhering to state requirements;
- Compliance with Card-Brand (Visa, MasterCard, American Express, etc.) rules
FDCPA guidelines prohibit “the collection of any amount (including any interest, fee, charge, or expense incidental to the principal obligation) unless such amount is expressly authorized by the agreement creating the debt or permitted by law,” 15 U.S.C. 1692f(1). However, a third-party vendor, in most cases a payment processor, can charge the fee because that vendor is not subject to FDCPA, which only applies to third-party debt collectors.
The second leg of compliance is the state requirements or restrictions. Abiding by these rules is not as simple as just keeping a list of restricted states, as case law is constantly changing. Due to the dynamic nature of state requirements, it is crucial to monitor these changes and work with partners who stay up to date on statutes and can handle the differences in their technology.
Most of the payment processors who offer convenience fees are doing so in compliance with FDCPA and state requirements. From the card-brand perspective, however, there is a set of very specific rules pertaining to added charges such as convenience fees, Visa’s being the most restrictive, and many popular solutions are not in compliance with these rules.
Visa defines three main types of fees: Surcharges, Convenience Fees, and Service Fees, each with their own set of restrictions. In the US, a Merchant that charges a Convenience Fee must ensure that the fee is assessed as follows:
1) 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
2) Added only to a Transaction completed in a Card-Absent Environment
3) Not charged if the Merchant operates exclusively in a Card-Absent Environment
4) Charged only by the Merchant that provides goods or services to the Cardholder
5) Applicable to all forms of payment accepted in the payment channel
6) Disclosed clearly to the Cardholder:
– As a charge for the alternative payment channel convenience
– Before the completion of the Transaction the Cardholder must be given the opportunity to cancel.
7) A flat or fixed amount, regardless of the value of the payment due
8) Included as part of the total amount of the Transaction and not collected separately
9) Not charged in addition to a surcharge
10) Not charged on a Recurring Transaction or an Installment Transaction
It’s the fourth and eighth items in this list that can, together, compromise a merchant account quickly: Convenience fees have to appear (and be processed and authorized) as a single transaction by the merchant of record.
As you are reading this, if you’re currently deploying or considering a convenience fee model that involves running the fee as a separate transaction, you may be at risk of losing your merchant processing account.
Fully compliant programs do exist that can minimize your business risk while reducing your payment acceptance costs.
Click here to learn more.