New Technology for New Credit Card Rules for Local Governments - What You Need to Know

This article highlights new technology that has just entered the marketplace that allows governments to pass along a credit card "convenience fee" automatically to customers in face-to-face transactions.

Background.
In a retail environment, a transaction fee is charged to the merchant whenever a customer makes a purchase using a credit card. Merchants are prohibited by the credit card companies from passing this transaction fee to the customer who uses the credit card, so merchants typically hide this fee in the price of their goods or services. Thus, all customers bear the burden of the fee. This is appropriate because merchants have control over the price of their goods and customers are making voluntary payments (i.e., they are not required to make the purchase).

In contrast, in most governments, government fees are set by ordinance or statute and 100 percent of the fee must be collected by the government, which leaves no room to budget the transaction fee. In addition, most of these fees and taxes are "involuntary payments", that is, the citizen does not have the choice to make the payment. Furthermore, many local governments collect payments for another level of government. For example, in Minnesota, cities and counties collect fees for the State Division of Driver & Vehicle Services and Department of Natural Resources, and in Missouri, county tax collectors collect revenues for cities and towns.

Recently, in November 2007, MasterCard decided to allow governments to charge a convenience fee to customers who pay by credit card in face-to-face transactions. American Express adopted a similar policy in January 2008.

The Programs.
MasterCard and American Express each have a convenience fee program for participating government and education entities, or their third-party agents (collecting fees for them). Participants in the MasterCard program must meet the following requirements:
- Participants that store or process MasterCard account data for Internet-based transactions must provide evidence of compliance with the MasterCard Site Data Protection (SDP) program's underlying Payment Card Industry (PCI) Data Security Standard to their payment processing company.
- Participants using a third-party for storage and processing of MasterCard account data must document this on their registration form so MasterCard can ensure that the third party is SDP compliant.
- Cardholders must be notified of the convenience fee at the time of payment and be given the opportunity to opt out of the sale. In no case may the entity collecting payment be allowed to charge the fee without disclosure to the cardholder prior to finalizing payment.
- Payments and convenience fees must be processed under a merchant category code that is eligible.
- A customer service phone number must be transmitted to citizens on their monthly statements.

Note: Additional requirements from both MasterCard and American Express may apply and you should check with your payment processor or third party service provider before assessing a convenience fee.

What Public Sector Entities are Eligible to Participate?
The MasterCard Program is open to the following educational institutions and public sector merchant categories:
- Government services; offices, departments and facilities that provide general support services for the government. This is a very broad based category including such entities as motor vehicle departments, parks & recreation departments, public safety departments (police/sheriff & fire), natural resources departments (hunting & fishing licenses and watercraft and snowmobile registrations), municipal airports, marinas, health services, convention centers and licensing boards, subject to approval by MasterCard.
- Government entities that administer and process local, state, and federal fines. Local, state, and federal entities that engage in financial administration and taxation.
- Local, state, and federal courts of law that administer and process court fees, alimony, and child support payments.
- Elementary and secondary schools for tuition and related fees, and school-maintained room and board.
- Colleges,