Credit Cards and “Convenience” Fees

Caveat – If you want a legal opinion, check with your lawyer. This column summarizes standard practices and court decisions to date.

Important reminder – We are addressing B2B, not B2C. This is a critical distinction. Most, if not all, court cases have addressed B2C. And where they have touched on B2B fees, for the most part, are legal.

Now let’s start with the presumption. Credit cards are designed for “cash-like” transactions. At retail, the merchant sells something. The consumer pays with cash, check, or credit card. It is an instantaneous transaction. And in most merchant account relationships, the merchant receives the actual funds in three or fewer days.

For that accommodation, the merchant pays a fee to a host of companies, and it is coordinated by the merchant credit card provider. Your invoice may show a lot of detailed expenses and you should only be concerned with the “all-in” costs.

At retail the merchant “swipes” a credit card (or has a chip reader). Those all-in rates are very competitive. In our industry, we are not retail, other than our distributors who have storefronts, and they typically do not extend terms to consumers. They quite often extend terms to businesses, however.

When we do not have physical possession of the credit card, the merchant charge industry views it as a “catalog” type sale. Frauds and related costs are much higher for the merchant credit card company, and we end up paying a much higher fee. Each of us has the ability to negotiate with our merchant vendor. For reference, the all in cost ranges from 2.0%+ to 3% depending on the vendor. How can we as vendors (distributor or supplier) recoup that cost?

It is a cost of doing business, just as you pay utilities, rent, and salaries, to mention a few. Be grateful that you do not incur that cost on 100% of your sales. Our annual estimate is 15% of total sales at GEMPIRE.

If the sale is paid by credit card at the time of sale, you are hard pressed to justify a fee. It is akin to a discounted term, such as 2/10 net 30. You are extending the discount in exchange for the immediate cash payment. We at GEMPIRE use the following language on all of our invoices – WE ONLY ACCEPT CREDIT CARD PAYMENTS WITHIN FIVE DAYS OF INVOICE DATE. ALL PAYMENTS AFTER 5 DAYS WILL INCUR A 2.5% FEE. Now, do we strictly enforce the policy? No. If it is a good customer, and it is a first time request, we remind them of the policy and give them a one-time hall pass. We mark their records and we watch it carefully in future transactions.

If it is a deadbeat (I trust that I do not need to define that term), we take the credit card. Getting the payment is of greater concern to us at that moment. We don’t sell them on open terms, so it becomes a moot point. If we want to get back our fee, we can calculate it into quotes on reorders, buried into the unit cost.

Where do the Courts stand on this matter?

Of all of the states that have statutes prohibiting the pass through of fees, only three had unclear language. However, there have been court decisions voiding those limitations. All of the other states specifically referenced “Consumer”, whether in the code or overseeing department. The only state that is somewhat vague is Connecticut. There are no local court decisions on the subject. If you wanted to take the safest position, do not assess a fee in that state until there are clear statutes that can withstand court scrutiny. Regarding the other 49 states and Puerto Rico, as long as your transaction is B2B, you are in relatively good standing.