The Many Flavors of Credit Card Fee Shifting

Although you've probably been charged a separate fee to use a credit card with a given business you may not know that businesses haven't always been able to do this.

In fact for most of the existence of credit cards card brands such as Visa and Mastercard have prohibited businesses, such as law firms, from shifting the cost of credit card processing to customers. 

This all changed in the early aughts when a number of businesses filed a class action lawsuit against Visa, Mastercard, and numerous financial institutions that issue payment cards. These businesses alleged that the card brands were engaging in anti-competitive behavior - including prohibiting fee-shifting. The lawsuit was ultimately settled in 2012 with the card brands agreeing to a number of concessions including, most significantly for this discussion, allowing businesses to charge customers extra to use a credit card.

The settlement was a win for merchants who wanted more flexibility to expose the actual cost of credit card processing to consumers and to encourage consumers to use less costly payment methods. It was a win. But it wasn’t a rout. The card brands, state law, and even local lawyer regulators have retained a modest amount of power to direct how law firms surcharge. If you want more information on these rules and laws, check out our recent guide to law firm fee-shifting.

As a result, businesses have developed a number of different methods to shift fees to customers. What follows is a quick discussion of a few of the methods that businesses, such as law firms, are using to shift credit card fees to customers.

Increasing the overall fee

Attorneys have generally been free to decide what their services cost so long as they meet the requirement that fees are reasonable (of course each state has its own rule but the ABA version of the reasonableness requirement is Model Rule 1.5). Therefore, a firm could raise its prices by some percentage to "build in" the cost of payment processing.

Firms can also charge a “services fee” that includes costs such as payment processing, copies, administrative time, and other similar costs. Again, local rules may vary so lawyers should always confirm that their business practices comply with their jurisdiction’s requirements but subject to the reasonableness requirement and a maximum percentage restriction on shifting processing fees that card brands have instituted (firms can't charge more than it costs to process a given card and never more than 4%) there’s no reason firms can’t charge an overarching services fee to cover, among other fees and costs, the cost of processing. 

Cash Discounting

Another method of shifting the cost of credit card fees to clients is cash discounting. You’ve seen this on gas station signs. These are the service stations that offer one lower fee 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 (see our recent post on surcharging and discounting best practices), law firms in any state can engage in cash discounting.


Deploying Different Payment Methods

Merchants are also largely free to decide which payment methods they accept for which transactions and to institute minimum or maximum payment amounts for certain payment methods. As many have witnessed, smaller merchants often require a minimum total transaction cost in order for a customer to use a debit card. This is because debit cards have fixed costs that make them very costly for small transactions. 

In the law firm setting for smaller transactions, particularly in a high-volume practice, a firm may be willing to pay the cost of card processing for the convenience and collections benefits of offering a wide variety of payment methods such as eCheck, debit cards, and the more expensive credit cards. However, if a firm typically accepts a smaller number of higher value transactions or if a high-volume low-fee firm has a separate practice area that is characterized by a smaller number of high-value transactions, the firm could offer only eCheck (known as ACH), which is typically quite a bit cheaper than cards, for those transactions in order to reduce the overall cost of payment processing. We’ll write more about ACH for lawyers in the coming weeks.


Surcharging

The most obvious way to shift the cost of processing to clients is by surcharging that cost. Surcharging is very closely regulated by the card brands. Visa and Mastercard have issued rules that govern how law firms can surcharge. One rule is that firms may not surcharge more than the amount of the card fee for a specific card. Because there are hundreds of different cards it’s very hard for a law firm to know exactly what to charge for a surcharge. In addition, some payment processors use what’s called “tiered pricing” when charging for payment processing. Besides the fact that tiered pricing obfuscates the true cost of processing to their law firm customers, tiered pricing also makes it very hard for law firms to decipher the actual cost of cards that their clients use. This makes it very difficult for a law firm to surcharge without the help of their processor.

As a result of these complications, the safest way to surcharge without violating the card brand rules is to work with a payment processor who calculates the surcharge amount and automatically charges that to the client as a separate line item at the time of the transaction. This is the easiest option as it takes the burden of calculating and adding the surcharge to the bill off of the firm. In addition, if surcharging is deployed with alternate payment methods which the firm pays for such as ACH or debit cards, this method can reduce the cost of the more expensive credit card payment methods while still maintaining a payment option that is “free” to the customer. 

Mind your trust account

One final slightly self-serving note on the way out: if you do have a processor that’s doing the surcharging heavy lifting and you plan to take advance fees into your trust account be sure to work with a processor who is familiar with the legal sector like, ahem, Gravity Legal. Trust account funds are not the property of the firm but instead the property of the client until they are earned. As a result, those funds cannot be used for law firm business purposes - such as payment processing - until the client has authorized the expense or given prior permission. So, in the event that a firm wishes to surcharge on an electronically paid trust account deposit, the surcharge must (1) be paid immediately to the processor or deposited into the firm’s operating account for later withdrawal by the processor, and (2) must be calculated in addition to the total trust amount paid.

Thanks to the card brand class-action lawsuit a decade or so ago law firms, like all businesses, have a few different options when it comes to shifting credit card fees to clients. Among them are raising their fee, charging a blanket all-inclusive "services" fee, cash discounting, or surcharging. And so long as the firms comply with a few simple rules and keep their duties regarding client trust funds in mind, firms can do so without fear of reprisals from card brands or state or legal regulators. 

New Price Red Tag” by Mark Moz is licensed under CC BY 2.0.

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