The Simple Guide to Government Service Fee Models
By Matt Johnson, Solutions Engineer Lead; and Layla Bastar, Proposal Writer
When we sit down with governments, we always hear questions about payment processing and credit card fee models. And it’s no wonder: it’s confusing! This confusion can allow some vendors to take advantage of their clients.
A local government that accepts credit card payments should be armed with some baseline knowledge about payment and fee structures. This is especially important before entering into negotiations with merchant services providers, the entity that provides the city with the infrastructure to accept credit card transactions.
With this basic understanding, you can make the best decisions for your city and your constituents. Because we work with so many government entities, we are familiar with the numerous fee models, and we want to pass our knowledge along.
Payment processing: the key players
Before diving into billing models, it’s helpful to know the key players involved in the flow of funds and their roles in credit card transactions. With so many participants, it can be challenging to understand how everyone gets paid. A typical setup will involve a card issuer, acquirer, card brands, and the merchant (in this case, the city accepting payments). Their roles and respective fees are described below.
(This is you!) Any business entity that is authorized to accept credit card payments, like a city, county, or state government. If your customers are paying you by credit card, you are the merchant.
As the merchant, you are responsible for paying all of the fees below. There are a few ways these are assessed and can be recouped, as discussed next.
The financial institution (e.g., Capital One Bank) that issues credit to the cardholder, your customer.
Responsible for maintaining the cardholder relationship and extending the line of credit to the cardholder.
Interchange fees — Charged by the card issuer in order to compensate for the handling of funds and risk associated with processing credit cards. These are the majority of fees charged on a card payment.
Interchange fees are set by the card brands (Visa, Mastercard, Discover, and American Express) and paid by the merchant.
The financial institution that contracts with the merchant to process payments.
Responsible for processing transactions and providing the technology layer to interface with the card brand networks and banks.
Acquirer fees — Charged by the acquirer to the merchant for the services rendered. Typically a fixed amount per transaction.
These are charged on top of interchange fees.
Organizations that provide the networks to support card payments. They support the card issuers. Card brands include Visa, Mastercard, Discover, and American Express.
Card brand fees — Charged by card brands to merchants for supporting the card brand networks. Referred to as “dues and assessments.”
There are generally two categories of fees: per-transaction fees and fees that are assessed as your overall processing volume increases.
Credit card fee models
There are different types of fee structures a merchant services provider can offer to a local government. Understanding their nuances will help you be aware of the costs that you are agreeing to and who incurs them at each stage of processing. Let’s take a look at the two most common fee structures:
Absorbed fee model
In this model, your merchant services provider charges you for all card processing fees on the merchant statement (interchange fees, card brand fees, and acquirer fees). The merchant services provider then assesses their markup or transaction fee, which you can think of as their revenue earned. This markup is typically assessed per transaction, but it can be a fixed annual amount (similar to a subscription). The merchant services provider has a lot of flexibility in terms of setting these fees.
Convenience / service fee model
At the time of payment, the cardholder is charged an additional fee in order to complete the transaction. The fee that is assessed is paid directly to the merchant services provider.
This fee covers all three fee types (interchange fees, acquirer fees, and card brand fees), with the remaining difference serving as the merchant services provider’s revenue.
This model has less transparency since the merchant doesn’t see any of the processing fees directly. You will therefore always want to request a merchant statement if you decide on this model. This will allow you as the merchant to understand how much revenue your merchant services provider is truly earning on your account.
At CityBase, we happily share our merchant statements with our clients for the sake of transparency, even if we are assessing a fee to the cardholder.
It is important to note that there is a distinct difference between convenience and service fees, so be sure to read our post for more detail.
Questions cities should ask a payments vendor
Even if you’re not an expert on the topic, there are still a few questions that you should be asking merchant services providers in order to make sure that they’re who you want to work with. Having these questions prepared also shows that you have a basic understanding of billing models, which will discourage providers from attempting to take advantage of you.
Will we have access to merchant statements throughout the process?
The merchant statement is a guide to the price breakdown, as well as who incurs fees. Having a merchant statement will ensure that you have full transparency for all the fees being assessed throughout the process.
Which billing models do you support?
Fee structure setup is not a “one size fits all” situation, so you should beware of merchant services providers that don’t offer flexibility. If they can’t offer options in terms of fixed fees, variable fees, and types of models, then it might be best to look elsewhere. You need to know that the merchant services provider has the flexibility in their system to provide a billing structure that best meets the needs of your constituents.
How do I know I am giving the best rates to my constituents?
At the end of the day, you want to make the best decision for your constituents. As a public servant, you have dedicated yourself to serving the people and making their lives easier. Understanding these billing models will ensure that the merchant services provider is providing a setup that best serves your constituents by lowering fees as much as possible and preventing unnecessary overcharging.
How do I know I am getting the best rates to keep down our city’s costs per payment?
We’ve seen cases where the merchant hasn’t been properly onboarded with their provider, and is paying more by not receiving lower interchange rates. For example, merchants operating in the utility space have lower interchange rates to process credit cards if they opt into the Visa Utility Interchange Reimbursement Fee Program. However, if you charge a convenience fee to your customers, you get dinged, and you don’t get those lower interchange rates for utilities. (Read more on this here.) Asking about these special programs will help you further reduce your cost per payment.
Understanding payment fee structures for government
CityBase is ultimately in the govtech industry to provide accessible government services to residents while helping governments save money. For that to happen, governments need to feel empowered in making business decisions, by equipping themselves with the knowledge to make the right decisions for all constituents.
This post was originally published on the CityBase blog.