Payment Gateways II: Credit Card Convenience Fees

The purpose of this article is to familiarize merchants and resellers with the concept of transaction surcharges as an advanced feature to be considered during payment gateway/processor selection.

If this is the first time you are reading our “Payment Gateways II” series, please, start with the Introduction to improve your understanding of this post.

Some businesses require surcharging a fee on top of the original transaction amount. The two most common surcharge examples are credit card convenience fees and taxes.

Credit card convenience fees

Every time a merchant processes a transaction, there is a processing cost associated with it. Traditionally it used to be covered by the merchant. However, there is a practice of applying a credit card convenience fee, functioning as a surcharge on the original transaction, to pass the cost of processing to the cardholder. Historically associations, such as Visa, MasterCard tried to discourage the practice, but under the pressures of businesses they’ve accepted it. As a consequence, many merchants are now able to afford credit card processing, because they are charging convenience fee to cardholders.

Credit card convenience fee implementation

Credit card convenience fee can be processed as part of the original transaction or it can be processed as a separate transaction, resulting in two transactions on the card. The first option is often considered a better one; it is preferred by Visa, and, from cardholder’s viewpoint, it involves just a single transaction. The second option is unpopular with card associations, especially with Visa.

If a merchant business is limited in the capability of doing two transactions, it needs to go with a processor capable of accommodating the surcharge in a single transaction. If a business chooses to use two transactions through two different MIDs then it will need to somehow handle the situation when the second transaction doesn’t go through because of insufficient funds or network communication error.

A mechanism very similar to the one used for credit card convenience fees is also used for surcharging of taxes.

While support for surcharges is not a very critical factor, and the entire decision, whether to go with a processor or not, is not going to be based on it, it should be considered. So merchants should discuss the support for surcharges of credit card convenience fees with their processors.

Let us look at a real-life example of how credit card convenience fees are used.

Example

A bill payment service company has an online payment portal that utility companies can use to collect past due balances from their customers. The bill payment company wants to surcharge a 5 % convenience fee on every transaction processed to cover the costs of processing and its services.
The simplest way for the company is to send a single transaction and then get its 5 % as a rebate back from the processor. The ability to charge a credit card convenience fee as part of the original transaction and receive the money back from the processor as a form of rebate at the end of the month (or simply get its 5 % automatically deposited to its account the day after the transaction is processed) reduces the complexity of integration process for the bill payment company. In either case payment processing logic within the bill payment application becomes considerably easier (as there is no need for logic targeted at processing of credit card convenience fee as a separate transaction).

Conclusion

Businesses that need to charge credit card convenience fees should go with a processor that has native support for that. When evaluating processors’ convenience fee support capabilities, businesses should pay attention to the available mechanism (one transaction vs two transactions); the decision regarding processor selection should be made based on the specific business requirements.