Customer payments are the lifeline of all businesses. However, accepting payments can sometimes come at a cost, particularly when it comes to accepting electronic payments.

While more consumers are making electronic payments, many businesses are passing credit card processing fees - which can be up to 3.5% per transaction in some cases - back to the customers in the form of a “convenience” fee. However, for the consumer, the fee is anything but convenient, especially when businesses offer no other payment options. Rather than absorb the cost of accepting credit cards, many businesses force consumers to pay extra on top of the cost of the product or service they’re already paying for.

The Cost of Accepting Credit Cards

It takes several businesses to process a credit or debit card transaction. Each of those businesses charges a fee for their role in completing the transaction. First, there’s a fee charged by the credit card processing network - Visa, MasterCard, American Express, and Discover. Then, the consumer’s credit card issuer charges a fee. That’s banks like Capital One and Citi. American Express and Discover are both the processing network and the issuer for the majority of their credit cards. Another portion of the fee is paid to the acquiring bank, processor, ISO, software provider, gateway, and other businesses who help make a credit card transaction happen.

Credit card processing fees are typically a flat rate plus a percentage of the transaction and can vary depending on the type of credit card, your business type, the way you accept credit card, and several other factors.

The Legality of Convenience Fees

It’s not against the law for businesses to charge convenience fees, which shouldn’t be confused with credit card surcharges. Convenience fees are charged for the convenience of using a payment channel other than the business’ primary payment channel. For example, a business that primarily accepts face-to-face payments, may choose to assess a fee on online payments. Surcharges, on the other hand, are charged simply for the ability to use a credit card. Both types of fees must stay under a certain percentage of the purchase and can’t be assessed in any state that’s banned them.

Credit card processing network agreements also define when businesses can charge a convenience fee.

Visa allows convenience fees, but has a few rules. The payment must occur with an alternate payment channel, like by online or via phone. The customer must be told about the fee before the purchase. Any convenience fee must be a flat rate, not a percentage of the transaction.

MasterCard allows government agencies and educational institutions to charge a credit card convenience fee, but they must offer other payment methods that don’t charge a fee.

American Express allows businesses to charge convenience fees, but only for certain types of transactions. The convenience fee must be disclosed to the customer and using a credit card must actually be a convenience for the customer.

Discover doesn’t have a policy on credit card convenience fees, but requires businesses to treat all credit cards the same.

Businesses in the collections industry must also follow the Fair Debt Collection Practices Act when charging a convenience fee. According to the FDCPA, the consumer must be reasonably able to avoid paying the fee, e.g. through another payment channel and the fee cannot be a source of revenue for the agency. Collections businesses who charge a convenience fee for certain payment channels are also required to let customers know how they can avoid the fee.

Accepting Credit Cards is Beneficial for Businesses

Some business owners may not even realize their customers are being charged a convenience fee for electronic payments. For example, No Cost to Biller payment processing platforms promise no fees to the merchant and instead charge a fee to the customer. The business never sees the convenience fee; instead, it’s automatically passed to the payment service provider.

While convenience fees are passed off as a favor to consumers for the ability to use their credit cards, businesses benefit from offering electronic payment methods.

• Consumers are using credit and debit cards more and checks less. A recent Federal Reserve report says nearly 60% of U.S. consumers use credit cards over cash. This makes it essential to accept credit cards if you want consumers to be able to pay you. Plus, rewards credit cards incentivize consumers to use their credit cards more.

• Accepting credit and debit cards means you no longer have to make trips to the bank to make deposits.

• Accepting credit cards reduces the risk of a bounced checks since the processing network will decline transactions when customer funds aren’t available.

• You can receive payments at anytime of the day and any day of the week without requiring staff available to take payments.

• When it’s easier for consumers to pay, you can reduce debt collection costs.

Because businesses benefit from accepting credit cards in a number of ways, it’s not just to pass off the cost of accepting credit cards onto customers. Before you tack on a convenience fee - or choose a payment service provider who charges a convenience fee - assess how it affects your relationship with the customer and whether the convenience fee will cause some customers not to pay at all.

Businesses concerned about the rising cost of accepting electronic payments may be able to control their credit card processing fees by shopping credit card processors; the same way you would with any other product or service. However, make sure you’re not choosing a credit card processor based on price alone. Consider the value and quality of services from your payment services provider you’ll receive in addition to the rate you’ll pay. The company with the lowest rate isn’t always the best option.

Finally, there are a few ways businesses can handle credit card processing costs without making the consumer pay the cost. Transaction costs can be built into the price of products and services raising prices across the board. Or, where available, customers can be offered a discount for using another payment. Finally, businesses can absorb the cost and adjust finances elsewhere. No matter what you choose, your customers will be more satisfied and more likely to pay when they’re not stuck with the inconvenience of a convenience fee.