Deciding Whether To Accept Credit Cards
(from Maine Townsman, October 2009)
By Chad Snow
The ability to accept credit and debit card payments for local government services is increasing in demand and becoming more widely available. A new state law (see article on page 27) has given more flexibility and choices to Maine municipalities for deciding whether or not to accept credit card payments, either directly with a credit card company or through a third party service provider. While some municipalities in the state already accept credit card payments, others are evaluating the new choices they have before offering customers the ability to pay for services using a credit card.
CREDIT CARD TYPES
Most Maine municipalities that do accept credit card payments today accept MasterCard, Visa and Discover. As the municipality develops a policy which addresses credit card payments, it will need to decide the types of credit cards it will accept. Credit card vendors in the market have reported that the types of transactions that can be paid for and the amount of fees charged to the municipality can vary based on card type. If a municipality decides to accept credit card payments, it will be important to talk with the vendor to understand the fee structure that will either be paid by the municipality or passed on to the customer.
If a municipality decides to accept credit card payments, a review of internal controls will need to be conducted to ensure processes are acceptable to audit standards and in line with industry best practices. For example, the process of making adjustments, refunds, and voids will need to be documented and potentially adjusted to accommodate credit cards.
On the surface, the process of accepting credit card payments would seem to potentially create additional reconciliation and internal control issues for municipalities. The reality, however, is that accepting credit card payments can create fewer internal control issues compared to processing cash or checks.
Credit cards are validated at the time the transaction is processed, as opposed to a check which will not be reconciled until 1-2 days after the transaction and may be returned to the municipality for insufficient funds, which can generate additional work for the municipality attempting to recover the funds. However, by this time, the license, permit, registration etc, has already been issued to the customer. A detailed audit log from the credit card vendor (usually provided on a daily or weekly basis) can be compared to register transactions for ease of reconciliation as opposed to cash which is sometimes a one-sided reconciliation process to a cash register log.
A municipality should consider that adding credit cards as a payment type available to customers will not necessarily create increased work for staff, and may, in some cases, actually help to streamline internal processes.
The new state law allowing municipalities to pass on the “merchant fee” to the customer who uses a credit card to conduct municipal business gives Maine municipalities alternatives when it comes to deciding whether or not to accept credit cards. While some Maine municipalities, in the past, have used online “convenience fees” to get around the standard policy of credit card issuers that requires the merchant to absorb the credit card transaction fees, this new law provides more flexibility for municipalities. However, with this flexibility comes customer considerations. Municipalities should be prepared for increased customer inquiries as to the nature of the fees, the fee structure and reasoning behind any fees passed onto the customer.
CREDIT CARD FEE MODELS
For governmental entities, there are two options to be considered in how credit card fees are handled – the Convenience Fee Model and the Absorption Fee Model.
Convenience Fee Model
This model assesses a fee to the customer for the “convenience” of paying by credit card. In this model, the customer is assessed an additional fee above the transaction amount, in the form of either a flat fee or a percentage of the overall transaction amount. [While “convenience fee” is the common term used for this fee payment model, some questions have been raised regarding its application to all electronic payments under Maine’s Consumer Credit Code.]
Advantages of Convenience Fee
1) Gives customers the ability to pay by credit card.
2) The municipality does not incur any additional expense for allowing a customer to pay by credit card.
3) Reconciliation is done at the end of the day since the transactions are treated the same as a check.
4) In most cases, hardware is supplied and supported by the credit card vendor.
Disadvantages of Convenience Fees
1) Increased cost to the customer for use of their credit card.
2) Decreased customer “satisfaction” levels. Many municipalities accepting credit cards reported customer complaints related to the convenience fee.
Absorption Fee Model
This model charges the municipality a “merchant fee”, typically based on the volume and value of the business being transacted. This model is used almost exclusively in private sector business transactions. The fees associated with processing credit card payments – merchant fees – are “absorbed” by the company that accepts credit cards, not by the customer. Monthly fees are negotiated between the credit card issuer or “third party service provider” and the credit card merchant. An average sized business (or perhaps a mid-sized municipality) could expect to pay 1.5 to 2.0% or more of the total average transactions for the month. While this model assumes the “merchant” will absorb all the fees associated with the credit card transaction, the new state law does permit a municipality to pass on some, or all, of these costs to the customer (see article on page 27).
Advantages of Absorption Fees
1) Gives customers the ability to pay by credit card.
2) Vendor supports all hardware with no cost to merchant.
3) Increased customer satisfaction.
Disadvantages of Absorption Fees
1) Municipality pays the monthly fee to a credit card issuer to give customers the flexibility to pay by credit card.
2) Since the municipality covers the fee for each credit card transaction, they are not receiving 100% of the revenues being charging the customer.
As a municipality begins to consider accepting credit card payments, it will be important to develop a strategy for implementing credit card payments that will allow the municipality to consider all of the pros and cons associated with credit card payments. Documented and agreed upon policies and procedures that address internal control, reconciliation and business process changes will assist in mitigating some of the issues a municipality may encounter as it implements a credit card program.
Based on industry trends, lessons learned from other municipalities nationwide that have implemented credit card processing, the following “next steps” could be considered by your town/city prior to implementing credit card processing. The experiences of other municipalities across the country that have implemented credit card processing have shown that there is more to accepting credit card payments than signing a contract with a vendor and plugging in the credit card hardware.
Decide on the fee model to be used, the credit card types and the transaction types that will be accepted. It is important for the municipality to decide on a credit card fee model to be used, convenience or absorption model (or partial absorption fee). In addition, the municipality should determine the types of credit cards and transaction types that will be accepted, i.e. American Express, Discover, Master Card, Visa, etc. Making the decision on the fee model and credit card and transaction types accepted is the first critical step the municipality must make as part of implementing credit card payments. This decision will dictate many of the future decisions that must be made and serve as the foundation for the credit card strategy.
Develop documented policy and procedures to address credit card issues. Once the municipality determines the fee models and credit card types accepted, it should begin the process of developing documented policies and procedures that describe the decisions made, and create the framework for implementing credit card functionality. The policies and procedures should be reviewed and agreed upon by all stakeholders, including finance staff, managers and elected officials.
Develop requirements for credit card processing functionality. The municipality should develop technical requirements related to the credit card process. For example, the municipality should document any unique features required, such as the ability to process credit card payments online, allow reporting on transactions, security logs, etc. The extent of the requirements will largely depend on guidance provided by existing finance, IT and auditor policies.
Decide how the credit card processing will interface with other systems. The municipality should decide how the overall credit card processing functionality will interface with existing systems. For example, if the town allows payment by credit card at the counter, will they also allow credit card payments through the town’s website for tax bills, motor vehicle registrations, etc?
Conduct an evaluation process to select a credit card vendor. The municipality needs to conduct an evaluation process to select a credit card vendor that supports the policies and procedures, and requirements of the municipality’s credit card business processes. A formal procurement and selection process will allow the municipality to compare multiple credit card vendors and evaluate them against the municipality’s requirements. A formal procurement process will also allow the municipality to involve appropriate stakeholders from the town and could include citizen input as well.
Develop a strategy for reconciliation based on the functionality and restrictions of the credit card vendor chosen. Once the municipality has selected a credit card vendor the municipality should develop a strategy for how reconciliation will be completed based on the functionality available from the credit card vendor. The process for developing a reconciliation policy will need to address the frequency in which reconciliation will be completed, and the information available from the credit card vendor as well as the municipality’s bank.
Redesign business processes as a result of credit card functionality. In conjunction with the implementation of the credit card processing, the municipality should conduct a business process redesign to accommodate the new credit card processes. The business process redesign should be focused on streamlining the cashiering process related to credit card processing, end of day balancing, reconciliation, and reporting.
As the municipality develops a credit card strategy and addresses the considerations, described here, it will be important to ensure that newly developed policies and procedures regarding credit card payments support town processes and mitigate the issues associated with credit card processing (protecting credit card data, reconciliation, etc).
Chad Snow is the Public Sector Consulting Manager for Berry, Dunn, McNeil & Parker, email@example.com