Memorandum 18-086 Credit Card Processing Fees

Memorandum 18-086

TO:                        Mayor Zak and Homer City Council  

FROM:                 Katie Koester, City Manager

DATE:                   July 18, 2018

SUBJECT:          Credit Card Processing Fees

Resolution 18-065 amends the fee schedule to reflect current practice by allowing credit card payment of ground leases. In anticipation of this stimulating broader conversation on credit cards, I have gathered some relevant information to inform your deliberation.

The majority of the City’s leaseholders make their annual lease payment with a check.  In the past, of the twenty-eight (28) harbor leases, seven (7) paid by credit card.  Based on this history, and the range of credit card processing fees, the fee charged the City for those seven leases ranges from $2,400 to $4,800. If all City leases were paid by credit card, that range would increase to $6,000 to $12,000 in fees exclusively related to the credit card processing of ground lease payments.

Credit cards are widely used for all City services and represent a convenience the customer expects. The Port and Harbor has seen a decrease in NSF check with the widespread use of credit cards which also saves staff time not having to track down bad debt. However, the transactions can be quite large and the fees substantial, as any small business person can relate to. The average cost to process credit cards is roughly 2% to 4%. Based on 2016 actuals, the City spends just under $100,000 a year on credit card processing fees, the bulk of which is at the Port and Harbor ($70,000) and Water and Sewer ($25,000).

There are state and federal laws that dictate weather or not organizations can charge a ‘convenience fee’ for using a credit card. As you can imagine, the credit card companies care a great deal that their form of payment is not discouraged by vendors. For example, we have to take payment for utilities by credit card. Of course there is a good business argument to be made for accepting credit cards – anytime we can encourage payment and make the experience easier for the customer is a win. The electronic nature of the transaction (no cash handling or data entry, for example) also often makes credit card a preferred form of payment.

Credit card processing fees are extensive and far from straight forward.  There are a myriad of fees and variables associated with processing payments (see table). 

Fees and variables associated with processing credit card payments:

Type of card used: VISA, MC, American Express etc.

Processing method. Card present (at the counter) or not present (over the phone or online). 

Whether a PIN is used

Debit cards fees tend to be less than a credit card transactions.

Fees that are a combination of a percentage, transactional fees, flat fees, etc.

Fees vary by name and applicability.

    Fees vary by transaction type.

In many ways credit card processing fees are an unavoidable cost of doing business. The regulatory environment related to vendor’s ability to charge convenience fees is also a moving target as credit card companies push back on regulation. If Council is uncomfortable with accepting large payments by credit card, I would recommend amending the Resolution and I will spend some time researching the legal parameters of a convenience fee (3% for ground lease payments, for example). In my limited research municipalities such as the Kenai Peninsula Borough and MatSu Borough charge a fee for payment of property taxes by credit card, but not other services.