What is a 'Convenience Fee'

A convenience fee is a fee assessed by a payee when a consumer pays with an electronic payment card rather than by cash, check or Automated Clearing House (ACH) transfer. Convenience fees can be a fixed dollar amount or a percentage of the transaction amount (usually 2% to 3%) and must be disclosed to the consumer in advance. Types of payments where the payee typically charges a convenience fee include mortgage payments, property tax payments, college tuition and taxes.

BREAKING DOWN 'Convenience Fee'

Convenience fees can help the payee to cover some of the costs imposed through electronic payment processing. Merchants generally include processing fees as an expense and consider them a marketing cost that helps to bring more customers to their store. Therefore most merchants usually do not require a convenience fee. Convenience fees are regulated by state laws and also by network processors which further limits their use since they can be illegal in some states or under certain contract agreements.

Incurring Convenience Fees

Generally a payor will incur convenience fees on installment payments or what may be considered non-standard transactions such as mortgage payments, property tax payments, college tuition and taxes.

For example, suppose you want to pay the IRS by credit card. The IRS will accept credit card payments through several different payment processing companies, and they all charge convenience fees. One might charge 1.88% with a $2.75 minimum, while another might charge 2.35% with a $3.50 minimum. Thus, if you need to send the IRS $2,000 and you wanted to pay by credit card, you could be required to pay a convenience fee of 0.0188 × $2,000 = $37.60.

Convenience Fee Regulations

Some people might not mind paying a convenience fee for the benefit of using an electronic payment card for payment. However, this practice is regulated by both state legislations and card networks. As a regulated act, payees must be cautious in instituting convenience fees for customers and generally convenience fees are not often charged by merchants.

Merchant convenience fees have been outlawed in 10 states including California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma and Texas. States that do allow them give merchants the ability to set their own convenience fee levels with caps usually at approximately 4%.

Charging a convenience fee is advantageous for a merchant as it helps to cover costs associated with per transaction fees and their merchant acquiring bank. When a merchant allows for electronic payments they must partner with a merchant acquiring bank to facilitate the payments. This involves monthly fees and transaction fees charged by the merchant acquiring bank as well as transaction fees charged by payment processors.

Charging a convenience fee can help to cover some of the electronic payment processing costs. However, payees must also be cautious of agreement terms. Some branded card processing networks do not allow convenience fees to be charged. If convenience fees are not allowed by a processing network it will be disclosed in the processor’s agreement with the merchant acquiring bank which thus passes on the convenience fee terms to merchants through detailed merchant account agreements.

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