Shifting Credit Card Processing Fees: What Law Firms Need To Know

Accepting electronic payment is table stakes for most lawyers and law firms.

The Clio Trends Report has been fairly explicit about the benefits of electronic payments:

  • The 2019 Clio Trends Report stated that 57 percent of electronic payments get paid the same day they are billed, and 85 percent get paid within a week.
  • The 2018 Clio Trends Report found that 38 percent of consumers prefer to make payments electronically via email, online portal, or on the web.
  • Finally, that same 2018 report indicated that 50 percent of consumers are more likely to hire a lawyer who takes electronic payments, or, stated another way, 40 percent would never hire a lawyer who doesn’t take credit or debit cards.

And if you need more convincing, take a look at some of the stats about how much of the world has moved online in light of the COVID-19 global pandemic:

  • The New York Times reported that, unsurprisingly, usage of Zoom, Google Meets, Microsoft Teams, and other collaboration tools skyrocketed after the lockdowns were put into place in March 2020.
  • Closer to the Gravity Legal business, the pandemic witnessed a huge shift away from cash and physical currency: PayPal CEO Dan Schulman asserted that digital payments have moved from “being a nice-to-have capability to a must-have essential service.”
  • And there’s data point after data point of mobile digital commerce booming, an explosion in Venmo and Cash App, and an increasing openness to and interest in contactless payment.  

We’re all that much wiser to the risks of meeting, in person, to exchange literal filthy lucre.

Collections

Pandemic and Clio data aside, the business case for electronic payments is strong. First, firms that use electronic data get paid faster: on the Gravity Legal platform, we see that the average payment is outstanding for a mere fourteen days—compared to many firms that have 30-, 60-, and 90-day AR cycles. Beyond that, electronic payments also make it easier to track and reconcile payments. In most cases, at the very least, electronic payments come with an email to make tracking and reconciliation easy. If used in conjunction with a practice management system or connected to other systems via automation, payments can be directly linked back to a specific client and even a specific matter. While this doesn’t necessarily reduce the time to payment, it certainly reduces the time to revenue recognition and the time and cost expended for bookkeeping.

Fee Shifting: Optimizing collections and cost

For firms large and small, the case for electronic payments has never been stronger, yet research suggests that only 25 percent of law firms accept electronic payments. What’s holding the other 75 percent back? A concern we hear often is cost. Despite all the evidence—including the fact that the modest amount paid for payment processing, which dramatically increases collections, is far less than the amount firms often lose in uncollected bills—firms still resist paying that amount in order to accept credit, debit, and eCheck payments.

The good news is that if they’re open to being flexible, there is a way for these intransigent firms to access the benefits of electronic payments and minimize the costs of doing so: shifting processing fees. By deploying a variety of fee-shifting strategies, firms are blunting the cost of processing and still reaping the benefits of electronic payments. We’ll dive into these strategies in just a bit but first some background.

The litigious history of fee shifting

Many lawyers assume that charging clients an additional fee for payment processing is unethical or at least slimy, but the truth is a bit more complicated than that.

Credit card processing isn’t free. And those who make the most from it—everyone from card brands like Visa and Mastercard to the banks that issue the credit cards—have an incentive to hide the actual cost of their airline miles, cashback rewards, or vacation points from consumers. Historically, they did this in a number of ways, most relevant for this discussion is by prohibiting merchants who accept cards from charging an additional fee to use a credit card.

Ultimately, merchants and trade associations got fed up. In 2005, they filed a class action lawsuit against Visa, Mastercard, and numerous financial institutions that issue payment cards. The plaintiffs alleged price-fixing and anti-competitive trade practices—like prohibiting shifting client fees—in the credit card industry. The parties reached a settlement in 2012, and the results of the litigation were, among others: (1) a reduction in processing fees to compensate for inflated fees and, (2) permission for retailers to recoup credit card fees from consumers via fee shifting.

Unfortunately, this settlement applies only to the United States. All businesses in Canada, including law firms, are prohibited from shifting fees.

The Many Flavors of Shifting Fees

As simple as it sounds, there are actually a few different ways that a law firm can shift their fees to clients. We covered these in depth in a recent blog post. We’ll summarize a few of the main ones here for context but if you'd like to get this post plus that one and some bonus content, check out our 20 page white paper on shifting fees to clients.

Cash Discounting

The simplest method of shifting the cost of credit card fees to clients is cash discounting. You’ve seen businesses do this on gas station signs. These service stations offer one lower price for those who pay with cash and a higher fee for those who pay with a credit or debit card.  Provided the merchant follows some simple rules, which we discuss below and in our post on best practices for fee shifting, cash discounting is permitted in all states.

Surcharging

The most obvious way to shift the cost of processing to clients is by surcharging that cost—adding it onto the cost of a transaction. Again, get a more detailed read in our recent blog post on this process and the different ways to shift fees. But because many processors use a complicated—and intentionally opaque—pricing structure called “tiered pricing” and because there are hundreds of different credit and debit cards all with different fee structures, it’s challenging for a business or law firm to handle this process manually. Visa and Mastercard have also issued some rules for businesses that surcharge. One rule is that firms may only surcharge an amount less than the amount of the credit card fee. Compound these complications with those related to electronic payments and trust accounting, and we strongly recommend that a firm work with a payment processor that can calculate the surcharge and add it in automatically.  

Laws, regulations and rules to consider when shifting fees

No matter which method is used to shift processing fees, it’s good to be aware of the relevant laws and rules. Practically, fee shifting puts a very modest burden on the firm that chooses to use it. Firms looking for some best practices can find them in a recent blog post. That said, we know this is a legal audience, so we want to give you a full picture of the legal landscape.  

Settlement

The settlement in the payments class-action lawsuit had two major implications for businesses such as law firms that want the ability to shift processing fees. The first, as noted above, was that the settlement permitted businesses to do it. The second was that permission to shift fees was not extended to debit cards.

As we mentioned above, this settlement applies only in the United States. Firms in Canada may not shift processing fees.

State Laws

Some jurisdictions have passed laws limiting how businesses (not just law firms) implement fee shifting or whether it is allowed at all. You can access all of this information, including links to relevant state laws, on our state-by-state surcharging guide, but according to Visa, these states—Colorado, Connecticut, Kansas, Maine, and Massachusetts—have laws that either prohibit fee shifting or make the practice so difficult as to make it effectively impossible. You’ll note that we did not include Oklahoma although it is included on Visa’s list. Visa’s list was current as of October 2019, and in 2020, the Oklahoma attorney general issued an opinion that largely, though potentially controversially, invalidated the state’s ban on the practice of shifting fees.

 

Rules of Professional Conduct


Ethics Opinions on Shifting Processing Fees

Unsurprisingly, bar associations also have a say in how these fee-shifting strategies are implemented—at least for lawyers and law firms. There are a handful of states that have ethics opinions that prohibit shifting processing fees to clients. These states fall into roughly two buckets: (1) ABA states and (2) custom states. The other states explicitly permit shifting, haven’t taken a position, or allow legal sector-agnostic state laws and court decisions about merchant best practices to govern.

As we’ll discuss, the states in both of these categories acknowledge that these ethics opinions are "advisory in nature" and "not binding." Further, many of these opinions came out before the antitrust settlement, back when card brand rules prohibited merchants from shifting processing fees in their processing contracts. Finally, the ABA states rely upon ABA Opinion 338 issued in 1974, which was subsequently retracted by the ABA in ABA Ethics Opinion 00-419 in 2000.    

The ABA Rule states are Indiana, Iowa, Mississippi, Nebraska, and West Virginia. In the case of Indiana, Iowa, and Nebraska, those opinions quote directly from ABA Opinion 338:

"The lawyer may not because of his participation [in a credit card program] increase his fee for legal services rendered the client."

And while the Mississippi and West Virginia opinions don’t quote from Opinion 338 directly, they reference it as persuasive authority for their opinions.

The opinions of the two custom states don’t refer to ABA Opinion 338. In Alabama Legal Ethics Opinion 1993-19, the Alabama State Bar Office of General Counsel referred to an earlier precedent (currently not available online) that “approved the payment and receipt of legal fees via an approved credit card plan,” but added “No higher credit fee can be charged because of the lawyer’s participation.

Similarly, in Michigan, on August 5, 1993, the State Bar of Michigan released Ethics Opinion RI-168, which established that it was ethical for attorneys to accept credit cards “provided…[th]e lawyer shall not charge additional fees to compensate for the fact that the lawyer will be receiving less than 100% of the client's billings by using the credit card company.”

Like the ABA states, both of the custom states—Alabama and Michigan—openly acknowledge that these opinions are advisory only and non-binding.

Ultimately, this suggests that while all of these opinions are still formally in effect, it’s certainly reasonable to wonder whether a lawyer asking a question about fee shifting of the state bars in any of these states today might get a different answer, particularly in those states in which there is no state law prohibiting shifting processing fees. But given the risk of a grievance or trust account audit, it’s not surprising that most risk averse lawyers in both of these states wisely elect to steer clear of fee shifting.

Reasonable Fee

The requirement that a lawyer charge a reasonable fee is a baseline regulation in most if not all jurisdictions. As discussed above, ABA Model Rule 1.5 establishes that a lawyer’s fee must be reasonable. Practically every state has adopted this rule, with some states such as Florida and California adding additional consumer protections beyond the basic reasonableness requirement.

We’ll talk later about the fact that the card brand rules limit fee shifting to the amount of the fee on a specific card and that firms can’t charge more than 4% regardless the rules of professional conduct, but it certainly stands to reason that a law firm offering a shifted fee that’s significantly greater than the cost of processing—manually calculated or automatically calculated by a processor—is likely to violate the rules against unreasonable fees.

Trust Account Rules

The final set of rules to keep in mind are those around safekeeping property and client protection. ABA Model Rule 1.15, Safekeeping Property and the model rules for client protection provide the framework for the rules governing lawyers who want to accept client funds into their trust accounts in most states.

Model Rule 1.15 states that lawyers must “hold property of clients…in connection with a representation separate from the lawyer's own property…” Contrast “property of clients held in connection with a representation,” money or otherwise, with funds that a client pays to a lawyer for services that have already been rendered. Those are “earned fees.” If a lawyer holds funds in trust for the client, even if the lawyer plans to bill against those funds, they do not belong to the lawyer until those funds have been earned. As a result, the law firm is prohibited from using those fees for any business purpose—including to pay credit or debit card processing fees—until those funds are the property of the law firm.

This is a bit of a separate issue but a reminder, nonetheless, that it’s a good idea to work with a payment processor like Gravity Legal that understands the legal sector, even if a firm isn't shifting processing fees. If a firm accepts electronic payments into the trust account, the processing fees for that transfer must come out of the firm’s operating account and not the trust account. This is a modest divergence from a processor’s typical practice but it’s essential for lawyers to adhere to this rule, as failure to comply in some states is an automatic grievance. And even absent a grievance, a trust account audit is a hassle.

Nearly all states’ rules also explicitly or implicitly (by virtue of more restrictive rules on accounting and safekeeping property) prohibit mixing—the fancy word is “comingling”—funds of clients and third parties and law firms. Comingling occurs when a firm holds its funds in the same account where it is also holding funds belonging to clients or third parties. We won’t go into the details and risks about comingling here, but here’s a great discussion of the risks of comingling from legal malpractice insurer Aon. Spoiler alert: Do this incorrectly and you could be accused of stealing client funds.  

A firm that is shifting processing fees must comply with these same rules. This means that the amount charged for processing must be charged in addition to the trust advance amount.

Card Brand Rules

Finally, even despite the antitrust settlement, the card brands still have some influence on how merchants shift processing fees. They have issued a few simple rules that merchants like law firms must comply with if they want to shift processing fees to clients. We go into depth on these in our recent Best Practices post. We spell them out generally below but if you'd like to get this post, our Best Practices post, and a host of other related information, you might want to download our free 20 page white paper on surcharging:

  • Notify Visa and Mastercard at least 30 days in advance of beginning to shift processing fees.
  • Shift processing fees only on credit cards. Merchants may not shift fees on debit cards.
  • Limit the shifted processing amount to your merchant discount rate for the applicable credit card—this is card brand-speak for “you can’t charge more than it costs a law firm to process the card.”
  • You must notify customers and clients of the shifted fee, for both in-office and online transactions, at the point of sale and on every receipt.

The merchant cannot charge more than 4% as a processing fee, even if the actual cost of the card to the merchant is greater than 4%.  

Should you shift processing fees?

So, after all this, you’re probably asking, Should we shift processing fees? Well, in classic lawyer fashion, the answer is really “it depends.” While we at Gravity Legal believe strongly that you deserve the option to shift these fees, we think that the question of whether you should is entirely up to you and your firm. Here is a non-exhaustive list of questions that might help you sort out if shifting card fees is right for your firm:

  • Would your clients be comfortable with this practice?
  • Does your firm accept electronic payments into the trust account? And if so, are you prepared to deal with the modest complications of processing fees related to trust accounts?
  • Does your firm run lean and proud? One Gravity Legal customer markets itself as top-notch talent without all the overhead of a big firm. Clients know that they’re not paying high rates, so they expect that the firm might not pick up the credit card fee.
  • Do you offer alternate payment methods such as debit or ACH/eCheck that the firm pays for so the clients have a “free-to-them” method to pay even if you shift fees?
  • Are you dealing with a small number of high value transactions? This could be a good opportunity to introduce fee shifting and induce clients to use less expensive payment methods.
  • Or, does your firm do a high volume of lower value transactions? In that case, ease of payment and the accounts receivable benefit you get from offering different payment methods might be worth it, even if you have to eat the processing fees.
  • Does your firm have a legal services subscription offering, or do you keep client payment methods on file? In these cases, the added effort to pull out a bank account and routing number as opposed to a credit card might not seem like that big of a deal for a client if they know they only have to do it once to set up the recurring subscription payments and not every time they pay.

Each firm will have to make its own decision about the propriety of shifting processing fees, but hopefully these questions can help you begin the inquiry.

The broad adoption of electronic payment methods in the legal sector has been a boon for both firms and clients. Clients get ease and convenience of a variety of payment methods. Firms get the AR benefits and a customer-centric payment experience. With the payment industry’s antitrust issues largely behind it, only state laws and a few random ethics opinions stand in the way of law firms realizing the benefits of electronic payments coupled with the cost reduction of shifting processing fees. This practice is not for every firm, but with thoughtful consideration of a few key questions, firms are rightly empowered to deploy this tool in service of their clients and their own bottom line.

 

“Shift” by Laura Blankenship is licensed under CC BY-SA 2.0.

 

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