Managing the rising costs of payment acceptance with service fees

Due to evolving consumer payment preferences — especially among millennials and Generation Z — government agencies and public universities are finding that delivering an outstanding customer experience means they must be prepared to accept an array of payment types, including online and other card-not-present acceptance methods.

Here’s where accommodating customer payment preferences becomes a challenge: At the same time they’re offering preferred payment-method options, financial controllers at these agencies and universities are being tasked with carefully managing payment acceptance costs.

Why is this so difficult? Online and other card-not-present acceptance methods typically carry a higher risk of fraud, so the card brands establish higher interchange rates for those card transactions. Higher payment acceptance costs can present a challenge for financial controllers at government agencies and public universities on fixed budgets whose goal is to improve the customer payment experience while containing accompanying expenses.

Fortunately, there is an effective tool they can use to offset the cost of accepting online and other card-not-present payments: service fees.

Why service fees work

If they use service fees, government agencies don’t have to search for ways to cut corners or limit services in the face of rising payment acceptance costs. Implementing service fees provides eligible entities with substantial cost savings that can be used to shore up against budget shortfalls. The cost savings can also help fund other services or programs for citizens and students.

A service fee, a flat or percentage-based fee on transactions paid with methods other than cash or check, can be collected with a payment in both card-present and card-not-present environments. Service fees are authorized by the various card brands and have been around for more than 10 years.

Consumers have become accustomed to paying service fees for certain services in exchange for the ease – and reward points – of using their preferred payments method.

Implementing a compliant service fee program

Service fees can be time-consuming and confusing to implement, as there are specific card brand rules governing the collection of service fees. However, a successful program can be revenue neutral, allowing allocation of funds to important programs and services without levying new taxes or fees.

One place where government agencies under tight budget controls have been able to achieve success by offsetting costs through service fees is the Department of Motor Vehicles (DMV).

Case study: How service fees helped a DMV save money and improve the payment experience

One of the most active DMV agencies in the country — employing over 8,000 people and serving millions of residents — received a mandate to start accepting credit cards in all its field offices within a year, without increasing its existing operating budget.

The DMV decided to implement a managed service fee program tailored to its unique needs, requiring the program to seamlessly integrate with the multiple information technology partners that work with the agency.

The service fee program was an immediate and welcome success, modernizing the department and its field offices. The DMV now affordably accepts payments made online or at any facility via credit cards, debit cards and digital wallets. Residents pay when, how and where they want, while enjoying shorter queues, which has led to higher customer satisfaction levels. At the same time, DMV employees enjoy the operational efficiencies of streamlined processes, less paperwork and simpler reconciliation.

The DMV is happy with the decision to implement a managed service fee program and is operating much more efficiently without breaking its budget.

Reach out to us to learn more about how service fees and other solutions can help manage costs while offering consumers the ability to pay how they prefer.