What is a Service Charge
A service charge is a type of fee collected to pay for services related to the primary product or service being purchased. For example, a concert venue may charge a service fee in addition to the initial price of a ticket in order to cover the cost of security or for providing the convenience of electronic purchases.
BREAKING DOWN Service Charge
Service charges are often levied when human interaction between a consumer and the company is involved, with services beyond the physical good itself considered extra. Service charges go by a number of different names depending on the industry, including booking fees (hotels), security fees (travel), maintenance fees (banking) and customer service fees. Let’s look at some of these service charges in detail.
- Banking Industry: When you open a checking or savings account with a bank, the bank charges a monthly fee, known as a maintenance fee, which is debited from the account at the end of the month. Another example of a service fee is the fee charged for using the ATM of a competing bank. Also, an account holder who tries to transfer money to someone else using Interac e-Transfer or wire transfer may be charged a service fee by his or her bank. Bank service charges are typically set at a flat standard rate.
- Hospitality Industry: Most hotels and restaurants in the U.S. charge a service fee that’s a percentage of the total bill, often in lieu of tipping. The delivery fee charged for ordering room service at a hotel or a gratuity applied to the bill for a large group dining at a restaurant are examples of service charges. If the total bill on an order is $250, and gratuity is stated to be 18%, then the total bill to be paid is $250 + (18% x $250) = $295.
- Travel Industry: Airlines collect a number of service charges, some of which include checked or oversized baggage fees, change or cancellation fees, early seat selection fees and inflight experience charges, such as WiFi, food, beverage and entertainment. An airport improvement fee or embarkation fee is a service charge that is applicable to departing and connecting passengers at an airport. It is levied by the government or an airport management corporation, and the proceeds are usually intended for funding of major airport improvements or expansion of airport services. Depending on the location, the airport improvement fee is included in the cost of a traveler's airline ticket, in which case, the airline will forward the fee to the proper agency. However, in some locations the fee must be paid at the point of embarkation.
- Residential Property: Renting or leasing certain types of residential properties may have a service charge affixed to the monthly rent. For example, in addition to the rental cost of a condo unit, the tenant may also be required to pay a condo fee, which is a service charge for general cleaning and maintenance of the building occupied. Also, online rental platforms that link renters to property owners, such as Airbnb, have service charges to cover the payment fees associated with the reservation. The service charge is usually calculated as a percentage of the subtotal, and applies to renters and owners.