Convenience Fees in ARM – You can’t have your cake and eat it too

You have been told there’s an easy and legal way to offset payment processing fees, possibly even in states where it is legally not permitted, using something called a “No Fee To Merchant” model in ARM.

This model claims to work because the merchant/agency only collects the payment for the debt amount or installment, and a third-party processor charges the processing fees as a separate fee.  It sounds legit and might even pass state law but there is a catch.

You see, it’s not only state law that needs to be satisfied – the payment card brands also have rules, and this model violates many of their policies.

Using the most common card brand Visa as an example:

If it is a true Convenience fee, this model falls short of our rules for the following reasons:

  • It is not processed as part of the total payment
  • It is not charged by the Merchant of Record

If it is a Surcharge, it falls short of the rules for the following reasons:

  • It is not processed as part of the total
  • It is not charged by the Merchant of Record
  • It is on Debit Cards
  • Merchants are probably not registered to surcharge

And most likely if the agency is only using this to offset Card payments then it also violates the rule stating the fee or surcharge must be applied to all forms of payment – like ACH.

Finally, if the agency is offering payment plans, the rules only allow a fee to offset processing to be charged on the initial payment, so doing so on each subsequent payment on a plan violates the rules.

Bottom line, the No Fee to Merchant model cannot satisfy both State Law and Card Brand Rules at the same time; therefore, it is not compliant nor suitable for ARM.

  • Visa has informed us that they are taking non-compliance action against merchants using this model.
  • Impact of violating the Card Brand Rules can be devastating – losing the ability to ever accept card payments.
  • Impact of breaking State Law can bring huge fines and loss of license.

State Laws to Consider:

  • 54% of the population lives in states where card surcharges and convenience fees are not allowed.

Federal Laws to Consider:

  • Under the FDCPA, an additional fee may not be added to the balance, except where one of the following situations is present:
  1. The original creditor contract expressly permits the additional fee; or
  2. State law affirmatively permits the fee. (At this time, no such state laws exist.)
  • Whether or not a processor can charge the consumer a separate fee is a hotly contested issue, and subjects both the merchant and processor to potential legal action. In any event, VISA Rules strictly prohibit the charging of such a fee by the processor.