Credit Card Acceptance

Overview

Local governments are permitted – but not required – to accept credit and/or debit cards as a form of payment. Over time, local governments’ acceptance of credit and debit card payments has expanded from being used primarily for enterprise activities such as utility charges to include payment of taxes, fines, and charges for services of various types.

Local governments incur fees as a result of accepting these payment methods and have different options on how and whether to recover those fees. Some states have passed laws prohibiting merchants from adding fees to credit card transactions, but Washington is not one of them.

Government entities are encouraged to research these issues thoroughly and contact their bank’s merchant services department and/or third-party receipting vendors for complete details on the costs of accepting cards and the details on applying fees to credit card transactions.

Statutory Authority

Counties are the only local government entity specifically authorized by statute to accept electronic forms of payment such as credit and debit cards and to pass along fees. There is no similar statute permitting or prohibiting other local government entity types from imposing credit card acceptance fees.

RCW 36.29.190 provides the statutory authority for counties to accept electronic forms of payment such as credit and debit cards for payments of any kind. The county treasurer is to determine the transaction cost for processing electronic payments based on costs incurred by the treasurer, not to exceed the additional direct costs incurred by the county for accepting such payments. From this determination the county may set policy relating to recovery of costs for electronic payments.

RCW 36.29.190(1)(b) requires that payers using electronic payment must pay the transaction processing cost except under the following circumstances:

• Fees related to electronic payments for taxes, and/or interest and penalties associated with taxes may be absorbed by the county treasurer’s banking services budget (RCW 36.29.190(2)).
• The county treasurer may elect not to charge transaction processing costs within a specific category of non-tax payments if the county legislative authority or the legislative authority of a district where the county treasurer serves as ex officio treasurer finds that to do so is in the best interests of the county or district. In such cases, the costs may be absorbed by the county department or taxing district assessing the payment transactions.

Types of Cards

When formulating your jurisdiction’s policies, it is important to understand different types of cards that may be used for payment:

• Debit cards provide an immediate transfer of funds from the customer’s bank account to the merchant’s (government’s) bank account. Debit card transactions are the electronic version of the customer writing a check.
• Prepaid cards are treated as the same as cash.
• Credit cards and charge cards are an extension of credit to the cardholder. The merchant (government) receives payment immediately but the customer has a line of credit with the card company to repay at a more convenient time.

Additional Credit Card Definitions

It is also important to understand a number of other key terms related to credit card acceptance. In particular, there are numerous terms used for fees that may be added by the merchant at the point of sale. Terms such as convenience fee and checkout fee are sometimes used interchangeably by the public, but each has a distinct meaning to the payment networks.

This table does not include all the restrictions on the fees but offers general information on whether a fee is allowed on credit and debit transactions and whether the permissions differ between payment networks.

Merchant Accounts vs. Third-Party Processors

Local governments that wish to accept credit or debit cards have two general options for how to process payments: either create their own merchant account and process payments in-house, or contract with a third-party payment processing vendor. A local government’s size, services offered, and customer needs will play a significant role in this analysis.

Third-Party Processors

Many local governments – and especially smaller entities – find that contracting with a third-party payment processor is much simpler and easier to administer, although they may have higher interchange fees. This payment processor is an intermediary (third party) between the credit card issuer and local government. These vendors may handle both online and on-site payments and provide a web interface or software to support receipting of these forms of electronic payments.

Payment processors may charge a transaction fee directly to the card user, or to the agency, or both. Additionally, third-party processors typically remit payments collected to local government on a time-delayed basis. The recommended best practice by the State Auditor’s Office is that the receipting provider remit the funds within 24 hours of receiving them unless the agency’s treasurer has granted an exception of up to five days as allowed by state law (RCW 43.09.240).

Merchant Accounts

Alternatively, local governments may establish their own merchant accounts. The transaction charges a merchant is assessed by its bank will vary depending on the type of transaction and the payment method used. For example, in-person swiped or chip reader transactions may result in different transaction charges than those that are manually keyed in or entered through a phone or website. Because of these complex variables, municipalities should gain a thorough understanding of the fees charged by their merchant services bank.

Credit Card Surcharges and Service Fees

Initially, private and public entities that accepted credit cards were barred by the credit card companies from adding a surcharge or transaction fee in most circumstances. A class-action lawsuit changed that, and as a part of the settlement Visa and Mastercard now allow merchants (including local governments) to impose surcharges on credit card transactions. Discover and American Express also allow surcharges. Each of these companies generally requires that if a merchant imposes a fee on one credit card brand, it must be applied to all other card brands accepted by that merchant.

The evolution of credit card acceptance and the litigation on the ability to impose fees and/or surcharges has created considerable misunderstanding among merchants and local government entities about whether customers can be charged a fee for paying with credit and/or debit cards. Local governments may charge customers a fee, but the variety of fees and the circumstances under which they may be applied is confusing. The payment networks have myriad regulations, restrictions, and requirements that merchants must follow in order to charge a fee for card acceptance.

Surcharges

A local government entity that chooses to surcharge credit card payments must comply with certain notice, disclosure, and rate limitations imposed by credit card companies. Merchant surcharges must not be greater than the average discount rate and are capped at 4% of the transaction. Some of the steps merchants must take are:

• Notify their card brand(s) or their acquirer (a financial institution that processes credit/debit transactions) 30 days prior to starting a surcharge;
• Limit the surcharge amount to the merchant discount rate, not to exceed 4%;
• Disclose the surcharge fee both on the premises and (if accepting online payments) online; and
• Show the surcharge amount separately on the front of the receipt after the subtotal and before the final transaction amount.

Service Fees

However, government and higher education institutions are permitted to charge a "service fee" on Visa and Mastercard credit and debit card transactions as part of their Government and Higher Education Payment Program. Both payment networks allow service fees for payment of taxes, court costs, fines, and miscellaneous government services. Registration is required for the program.

Should you charge a fee or build it into the cost of business?

As the use of credit cards has proliferated, local governments have found different solutions to fit their specific circumstances and residents. Some governments have built credit card acceptance fees into the cost of doing business. Others prefer to add a surcharge to credit card transactions because they see it as a direct charge to the customer for the fees incurred and choose not to build banking fees for credit cards into the cost of doing business because it spreads the charge among all customers, not just those using credit cards.

Some jurisdictions have imposed surcharges only on specific transaction types such as building permitting, and others use third-party payment processors.

Credit card surcharges are increasingly common and the public has become used to them, but local governments remain cautious about imposing these fees. Card issuers have intricate fee structures and rules that merchants accepting cards must follow, and imposing a surcharge adds complexity. This alone may be enough to cause your entity to decide to incorporate all banking fees into your fee schedule.

Governments that impose a credit card surcharge directly should have it approved by the legislative body. However, third-party payment processors generally charge a fee directly to the card user, in which case the government does not need to include this fee on the fee schedule or have it approved by the legislative body.

The above graphic, developed by MRSC and adapted from an analysis by the City of Kirkland, shows that a large number of low-value transactions results in a higher percentage of credit card banking fees as a portion of credit card revenues. In this example, the average credit card transaction for parking in this example is $2 and the related banking fees incurred by the city are 12.5% of the total credit card revenue. By contrast, the development services department’s average transaction is $1,237, and credit card fees charged to the city are 2.5% of the total revenue.

Your jurisdiction will have a unique pattern of credit card revenues and fees that should be factored into your decision making.

Payment Card Industry (PCI) Compliance

PCI compliance refers to a set of security standards to ensure that every entity that accepts, processes, stores, or transmits credit card information maintains a secure environment. It is the merchant’s responsibility to be Payment Card Industry (PCI) compliant, even when using a third-party payment processor. Many local governments choose a PCI compliant third-party provider to ensure compliance without making changes to their internal systems. Using a third-party processor will reduce the set of standards to comply with, but it does not eliminate the PCI compliance obligations.

To assist with your PCI compliance process, the Security Standards Council has created a Self-Assessment Questionnaire to evaluate your cardholder data security.

Examples of Credit Card Acceptance Policies

Below are selected examples of local policies and other documents examining and authorizing the acceptance of credit and/or debit cards.

Policies/Procedures

• Bonney Lake Resolution No. 2012 (2010) – City administration may develop and administer internal procedures for acceptance of credit/debit card payments.
• Cross Valley Water District:
  • Resolution No. 2009-4-4 (2009) – Increasing credit card processing fees passed on to residential water customers.
  • Resolution No. 2009-12-1 (2009) – Commercial water customers may pay bills up to $500 with credit cards. Customer must pay processing fees.
• Everett Resolution No. 7338 (2019) – Adopting a service or convenience fee for credit and debit card transactions.
• Mason County Resolution No. 19-07 (2007) – Detailed credit/debit card acceptance policy and procedures. Addresses privacy of financial information, processing fees, and contracts for electronic payment services.
• San Juan County Code Ch. 3.30 – Authorizes credit cards for any payments, but also allows individual departments to opt out. County must absorb processing fees for all non-tax payments and may not pass them on to the customer.
• Spokane Municipal Code Sec. 07.10.30 – Allows departments to make the decision as to whether to absorb part or all of transaction costs, must be approved by CFO; requiring written policies.
• Tukwila Fee Schedule – Adds 3% processing fee to total order for building permits; online permits excluded
• Woodinville Municipal Code Ch. 3.40 – Authorizes finance director to execute agreements with banks or third party for credit card payment of fees, fines, and charges; authorizing the City Manager to approve credit card acceptance at the department level.

Other Documents

• Enumclaw Request for Proposals for Merchant Services (2016)
• Kirkland Credit Card Fees Staff Memo (2018) – Discusses credit card fees, number of transactions over time, and what neighboring cities do regarding fees. This is a helpful guide for what to consider when looking at how or whether to impose fees.

Recommended Resources

Below are some additional resources to help local governments develop their credit card acceptance policies.

• WA State Auditor’s Office: Contracting with Vendors to Accept or Process Your Payments – Guidance for selecting and managing third-party payment vendors
• Government Finance Officers Association (GFOA): Accepting Payment Cards and Selection of Payment Card Service Providers – Best practice for accepting credit and debit card payments.
• Mastercard:
  • Merchant surcharge rules webpage
  • Merchant surcharge FAQ
• PCI Security Standards Council: Best Practices for Maintaining Compliance – Document library of specifications, tools, measurements, and support resources to help organizations ensure the safe handling of cardholder information.
• Visa Card Merchant Surcharge Q&A