3 reasons governments and educational institutions should implement service fees
Use service and convenience fees on certain payments to cut costs and shore up revenues in the face of shortfalls and budget cuts.
By Veronica Correa Janssen, Head of Product Strategy, North America Vertical Markets, U.S. Bank Payment Services
As the COVID-19 pandemic continues to affect the economy, most organizations in the government and education sectors face budget cuts and shortfalls, creating added pressures when it comes to ensuring adequate resources are available to meet the demands during this challenging time.
Especially hard hit are state and local governments. Experts predict a $555 billion shortfall over state fiscal years 2020 to 2022. The shortfall is primarily attributed to lower tax revenues and funds redirected to addressing the more immediate crisis. Meanwhile, even optimistic estimates predict higher education institutions in the United States could suffer budgetary shortfalls of more than five percent, as international student enrollment grinds to a halt and domestic students opt to take gap years.
These conditions are forcing organizations to adapt with creative solutions for cutting costs or generating new revenue streams. One underused option is implementing service and convenience fees on certain payments, which can provide government and higher education entities with substantial cost savings that can be used to shore up against budget cuts and shortfalls.
What are service and convenience fees?
Service and convenience fees are widely accepted by cardholders and have been used in the U.S. to help offset payment acceptance costs for certain merchant types for over 10 years.
A service fee is a flat or percentage-based fee on transactions paid with methods other than cash or check. A convenience fee is a flat fee that helps offset costs associated with payments in card-not-present environments, such as over the phone or online. Unlike convenience fees, a service fee can be implemented for all non-cash payment methods, including in person payments.
There are many benefits of incorporating service and convenience fees into your transaction acceptance. Here are three of the most compelling reasons why it makes sense for government and educational institutions to do so:
1. Offset costs of accepting payments
When working with budgets defined by taxes, federal government transfers and utility charges, optimizing payments in the public sector is essential; something we covered in a recent webinar. Similarly, budgets defined by grants and endowments mean higher-education institutions must also do more with less. In these situations, managing expenses can make a considerable difference.
Service fees and convenience fees are revenue neutral and can enable your organization to better control costs associated with accepting card payments. Like user fees, they’re a “good alternative to taxes because they are paid solely by those who request and receive those specific services or benefits."
However, knowing which type of fee and how much to charge can be a challenge.
Service fees are only available to a limited set of business types and there are specific card brand rules governing their collection. Unlike a surcharging program, one benefit of service fees is that there are no set caps or rules around the amount as long as it’s reasonable in relation to the cost of accepting the payment transaction. This gives you flexibility to leverage a fee that matches your organization’s cost model.
Conversely, convenience fees are available to all business types but are only permitted in channels that provide a convenience to the payer, such as a web portal where a user can pay from the comfort of home. Due to the predictability of utility payments, a flat fee is assessed instead of a percentage. Service fees are not allowed on utility payments.
Fortunately, you can navigate the unique requirements for your organization with a dedicated program from Elavon that helps government and educational institutions efficiently and effectively implement service and convenience fees.
2. Affordable way to expand payment acceptance
In addition to supporting your organization’s operational expenses, service and convenience fees allow you to adapt to shifting consumer payment preferences. In recent years, there’s been a strong move towards digital payments including contactless cards, smartphone digital wallets and online payments – and the pandemic is only fast-forwarding this trend to cashless.
Our recently released Government Payments Insight Report, based on survey data from January 2020, shows digital payment options are the new norm, and citizen expectations are shifting accordingly. For example, we found 39% of consumers prefer to pay using a digital payment service like Apple Pay® or Google Pay®, 39% prefer paying by phone using an interactive voice response system, and 12% prefer to pay through their online bank or the biller’s web portal or mobile app. Less than half of consumers (46%) say government agencies are keeping pace with other industries when it comes to payment innovation – which includes creative ways to view and pay bills.
Still, some constituents, particularly seniors, continue to prefer paying by mail or ACH check. We found that 46% of respondents had paid a government fine, fee or service by check via postal mail within the last 12 months. This shows that choice is key when it comes to payment options.
By leveraging service fees and convenience fees, government agencies and higher education institutions can keep up with consumer demands and securely accept payments online, over the phone or by mail while offsetting processing costs.
3. Improve efficiency and customer experience
Citizens rely on government agencies to provide vital services to their community, and students rely on colleges to provide them with formative learning experiences. Supplying these services requires these organizations to collect payments efficiently and consistently from the people they serve.
But paying for these services can be a hassle for consumers, who often face long lines at the DMV or school registrar’s office, resulting in negative customer service issues. Fortunately, as new technologies emerge and become more widely used, government agencies and educational institutions have ongoing opportunities to improve the customer experience.
Service and convenience fees are part of the way forward, allowing your organization to operate more efficiently by outsourcing fee management. By making it affordable to accept payments that minimize or eliminate touchpoints, service and convenience fees also help you boost customer experience and keep your customers and employees safe.
As your organization pivots to address the challenges of the pandemic, it’s important to consider solutions that help you cut costs today while making strategic investments for tomorrow. Learn more about how service and convenience fees can help.