Often businesses are bootstrapped and have to watch every penny. It becomes even more essential in a precarious economic environment like the one we face now. As merchants reevaluate their budgets and scrutinize every expense, their prerogative is to look for ways to offset the unavoidable costs of doing business. One area merchants have been focusing on is payment processing fees that they incur for accepting credit cards when selling goods and services. Payments by cash, check, and ACH is not susceptible to this scrutiny. Even debit card fees are palatable given the regulatory caps around those fees with the Durbin Amendment.
Given these trends, we feel this is a timely review where we look at a convenience fee, how it works, and can you charge one to your customers.
What is a Convenience Fee?
Since the credit card payment options may be an alternative to the merchant’s “preferred” mode of payment, such as cash, a merchant may choose to charge a convenience fee on the transaction. A convenience fee is a cost added to transactions by merchants if a consumer decides to pay via a credit card. The convenience fee can be a percent of the sale amount or a fixed amount.
How does a Convenience Fee work?
The most common way to charge a convenience fee is to ensure that there is convenience built into the transaction for which there is a fee—for example, paying for certain types of bills via an app or online banking. That saves customers the hassle of going somewhere, standing in line, and carrying cash to pay bills every time a different one comes in. God forbid if someone procrastinated until the last day and the store closed.
The convenience in this example would be to have an E-Payment system automatically import your data on bills and quickly pay for that with a push of a button, anytime, anywhere. There is no more standing in lines, no more time wasted to and from a specific location to carry out these transactions, and no more missed deadlines and the ensuing impact on customer credit.
Can You Charge a Convenience Fee to Your Customers?
Every card network has its own rules for charging convenience fees. Although American Express and Discover are not as transparent about this practice, Visa has a comprehensive guide to convenience fees. Below are the details of all the card networks regarding their rules on this fee.
Visa – this card network has the most comprehensive details about its rules regarding convenience fees. Specific rules are available in the company’s Visa Core Rules and Visa Product and Service Rules guidelines which were last updated in April 2022 in Section 5.5.2 Convenience Fees – Allowances, Requirements, Restrictions, Amounts, and Disclosures.
Some main points about convenience fees that apply to US merchants accepting Visa cards are:
- They may only charge them for online transactions.
- Not applicable if the merchant is solely an online merchant, in which case it becomes a surcharge, and the merchant has to decide which they want to charge since they can’t charge both.
- Not applicable on transactions associated with installment or subscription payments
- The fee must be clearly disclosed, giving the payor the opportunity to cancel the transaction if they don’t wish to pay for the cost.
- The convenience fee must be a flat fee and not one that is a percent of the transaction amount.
Mastercard – the rules from this card network are not as readily available as they are for Visa. However, we did find that the company’s rules allow for convenience fees on select types of transactions. They include:
- Tuition and related expenses for schools and colleges
- Government-mandated fees, such as court fees and fines, alimony, child support, and federal, state, and municipal taxes.
Like Visa, Mastercard stipulates that merchants must give the cardholder full disclosure of the fee and the chance to exit the transaction if they decide not to pay it.
American Express – the company does not have a position on convenience fees. It neither bans nor allows merchants to charge such a fee. The company’s American Express Merchant Reference Guide does mention some guidelines that include:
- Merchants should not apply convenience fees only to American Express cardholders. So if you’re charging such a fee, it should be uniform among all card networks.
- There should be a transparent disclosure of the fee and an opportunity for an opt-out.
Discover – Similar to American Express, Discover also has minimal guidelines around convenience fees. There is some commentary on the company’s website, alluding to allowing merchants to charge a convenience fee for payment of taxes online. There is also some mention of equal treatment of Discover cardholders compared to other card networks regarding this fee. There should be sufficient disclosures and the opportunity to exit the transaction if cardholders wish not to pay.
Businesses have a close eye on each expense looking to control or cut costs in regular times, let alone when economic conditions begin to tighten. One of the first costs merchants look at is the merchant service fees they pay to process credit card payments.
This is one cost that is growingly becoming a permanent fixture for merchants as the spending habits of consumers shift to a cashless mode of payment. As a result, more business owners are exploring options to offset these merchant service fees by incorporating something known as a convenience fee. Each card network has its own rules regarding convenience fees, and merchants are often advised to speak with their payment processors to understand better these details and what options they may have to charge a convenience fee. Businesses need to have a good grasp of a convenience fee or work with a payment processor that is familiar with its granularities, how such fees work, and whether businesses can charge one to their customers.