Using self service payment channels increases convenience for consumers. However, payment processing for electronic transactions can be pricey for merchants. Through imposing convenience fees, your customers can continue to enjoy the convenience of making urgency or self service portal payments without carrying the burden of higher processing fees.
“Free” is a Matter of How You Price Things
Every card transaction involves a number if different costs including assessment, interchange and transaction fees. Free payment processing, otherwise known as convenience fee payment processing, does not make these fees go away. Instead, consumers are required to pay a fee for the convenience of making payments on specified channels or portals. These fees are designed to offset the various processing costs associated with transactions. In other words, the cost of accepting the payment is passed on to your customers or clients.
Processing Convenience Fees
Many consumers are unaware of the costs associated with making payments. That’s because many businesses subsidize the processing fees associated with electronic transactions. However, each “free” transaction for consumers and clients actually involves a number of fees, including assessment, interchange and transaction fees.
Assessment Fees – These fees are paid directly to card issuers: Visa, American Express, MasterCard, Discover, etc. Assessment fees vary by card issuer and by the amount of the transaction.
Interchange Fees – Most branded cards are issued through banks and other financial institutions. Interchange fees are set by each card brand and are paid to banks and financial institutions. Interchange fees vary by industry, financial institution, card brand, card type, physical presence of card, and more. Interchange fees are usually lower for “card present” (presented for payment) versus “card not present” (e.g., online) transactions.
Transaction Fees – Transaction fees are straightforward — fees that are imposed for each payment made.
How to Put Together Your “Free” Processing Formula
While implementing convenience fee payment processing can provide significant savings for merchants, consumer pushback is a real risk. Because consumers have largely been shielded from the real costs of transactions, they may resent being required to pay for a service that was previously “free” for them. If competitors in your industry and/or geographical region don’t require consumers to pay processing fees, you could lose customers. Ensuring consumers understand what free payment options are available, such as in person or mail, will help to mitigate this risk and avoid confusion.
Legal Considerations of “Free” Processing
There are also legal considerations associated with implementing a convenience fee payment processing system. First, such systems are limited to specific industries. A partial list of these industries is included below:
- Billing and Collection Companies
- Hospitals
- Medical Based Offices such as Doctors
- Telecommunication Companies
- Utility Companies
In addition, several states prohibit convenience fees and/or surcharges. Merchants must be aware or leverage a processor who is knowledgeable and can make customizations necessary to meet state by state guidelines and restrictions.
Making payments electronically is convenient for consumers, but imposes additional costs on merchants. Implementing a convenience fee payment processing system can potentially translate into significant savings for merchants. However, there are legal and financial considerations involved with this type of system. Nonetheless, it is often worthwhile to pass processing fees on to consumers.
See the original version of this article on PaymentVision.
